Nutanix Inc (NTNX) Q3 2022 Earnings Call Transcript

Nutanix Inc (NASDAQ: NTNX) Q3 2022 earnings call dated May. 25, 2022

Corporate Participants:

Richard Valera — Vice President of Investor Relations

Rajiv Ramaswami — President & Chief Executive Officer

Rukmini Sivaraman — Chief Financial Officer

Analysts:

Rutu — Bank of America Merrill Lynch — Analyst

James E. Fish — Piper Sandler — Analyst

Meta Marshall — Morgan Stanley — Analyst

Nehal Chokshi — Northland Capital Markets — Analyst

Rod Hall — Goldman Sachs — Analyst

Erik Suppiger — JMP Securities — Analyst

Jake — Wells Fargo Securities — Analyst

Simon Leopold — Raymond James — Analyst

Presentation:

Operator

Good afternoon, and thank you for attending today’s Nutanix Q3 Fiscal 2022 Earnings Conference Call. My name is Selena, and I will be your moderator. [Operator Instructions].

I would now like to pass the conference over to our host, Rich Valera, Vice President of Investor Relations. Please go ahead.

Richard Valera — Vice President of Investor Relations

Good afternoon, and welcome to today’s conference call to discuss the results of our third quarter fiscal 2022.

Joining me today are Rajiv Ramaswami, Nutanix’ President and CEO, and Rukmini Sivaraman, Nutanix’ CFO.

After the market closed today, Nutanix issued a press release announcing financial results for its third quarter fiscal 2022. 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, strategies, 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, our competitive position and market opportunity, the timing and impacts of our current and future business model transitions, the factors driving our growth, macroeconomic, geopolitical and industry trends, including the ongoing global supply chain challenges and the current and anticipated impact of the COVID-19 pandemic. These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. For a detailed description of these risks and uncertainties please refer to our SEC filings, including our annual report on Form 10-K for the fiscal year ended July 31, 2021, and our quarterly reports on Form 10-Q for fiscal quarters ended October 31, 2021, and January 31, 2022, 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 the 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 42nd Annual William Blair Growth Stock Conference on June 6th.

And with that, I’ll turn the call over to Rajiv. Rajiv?

Rajiv Ramaswami — President & Chief Executive Officer

Thank you, Rich, and good afternoon, everyone. Against a volatile macro backdrop, we delivered another solid quarter exceeding all our guided metrics and seeing continued strong performance in our renewables business.

We continue to see solid demand for our Nutanix cloud platform driven by businesses looking to accelerate their digital transformation, modernize their data centers and adopt hybrid multi-cloud operating models. That said, the quarter didn’t finish as we had expected. Late in the third quarter, when we typically book a significant portion of our orders, we saw an unexpected impact from challenges that limited our upside in the quarter and affected our outlook for the fourth quarter.

Increased hardware supply chain delays resulted in an increasing percentage of our orders having start dates in future quarters, or in some cases, being delayed pending availability of hardware. This affected both our billings and revenue upside in Q3, and we expect this trend to continue in Q4.

In addition, after seeing our attrition rate among sales reps improved for each of the prior two quarters, we saw it worsen in Q3, driving a lower-than-expected rep headcount entering Q4. Rukmini will discuss these issues in more detail in her prepared remarks.

Overall, our third quarter reflected continued execution on our subscription model and was marked by solid top line and improving bottom line performance. We delivered ACV billings growth of 28%, bolstered by strong execution on our building base of renewables.

Our revenue, which continues to be affected by term compression, grew 17%. Top line growth, combined with diligent expense management and leverage from renewals, drove a sharp year-over-year improvement in non-GAAP operating income. While timing of collections adversely impacted our free cash flow performance for the quarter, we continue to prioritize working towards sustainable free cash flow generation in FY ’23.

Overall, we are pleased with our third quarter financial results. Our largest deal in the quarter reflected healthy adoption of our core Nutanix cloud infrastructure by customers looking to modernize their data centers and deploy hybrid cloud operating models as well as good traction with adjacent solutions in storage, database-as-a-service and cloud management.

A good example is a seven-figure deal with a large North American based energy exploration and operations company that was looking to modernize their traditional three-tier infrastructure while adding the flexibility of extending their workloads into the public cloud. This new customer has decided to adopt Nutanix cloud infrastructure, including Nutanix Cloud Clusters or NC2 for public cloud access as well as Nutanix Cloud Manager for full stack self-service automation, application life cycle management and hybrid multi-cloud management capabilities.

The Nutanix solution is expected to enable them to simplify their operations, reduce their support requirements and seamlessly extend their workloads into the public cloud.

Another example is an EMEA-based online sports betting platform that was looking to quickly deploy their service in a new region. They used Nutanix Cloud Infrastructure with NC2 to extend their service to a regional AWS location in the Asia Pacific region going from proof of concept to live deployment in just two weeks. Using NC2, they were able to expand operations into a new region virtually overnight, while benefiting from the simplicity of a single unified control plane across private and public clouds.

We recently launched our updated product portfolio that simplifies our packaging, metering and pricing and aligns our offerings with the solutions we saw our customers looking for. Roughly one quarter in, we’re very pleased with what we’re seeing. It’s streamlining the quoting process, increasing our competitiveness in all-flash configurations, enabling more high-velocity transactions for our full stack offerings comprising Nutanix Cloud Infrastructure and Nutanix Cloud Management and making it easier for customers to quickly identify solutions for their specific needs.

Our largest win in the quarter, a multimillion-dollar order with an EMEA-based company in the financial services sector was a good example of a deal that benefited from the adoption of our updated portfolio pricing and packaging. This new customer, who was unhappy with the performance of their business-critical applications on their existing three-tier infrastructure chose our new Nutanix Cloud Platform full stack offering comprising both Cloud Infrastructure and Cloud Management.

Due to its simplicity built in automation for Infrastructure-as-a-Service and total cost of ownership advantages versus competing alternatives. They also added Nutanix Unified Storage and Nutanix Database Service for their storage and database automation needs respectively, being impressed by their performance and seamless integration with the broader Nutanix platform.

Go-to-market leverage with partners has been one of my top priorities, and we continue to see progress on this front during the third quarter. I’m especially pleased with the momentum with Red Hat as we’ve been seeing a building pipeline and growing number of joint wins for both OpenShift and Red Hat Enterprise Linux running on Nutanix Cloud Infrastructure. One example is a North American-based financial services provider that we’re looking to reduce the time and resources required to manage OpenShift on their bare metal servers.

They decided to move their OpenShift environment, running their business-critical workloads to Nutanix Cloud Infrastructure, including its AHV hypervisor, looking to benefit from the simplicity and compelling total cost of ownership advantages of our Nutanix Core [Phonetic] platform versus their existing infrastructure.

We are excited about the large and building opportunity pipeline that we see with Red Hat. In the third quarter, we continued to receive industry recognition for both our Core Platform and our Unified Storage solutions. Nutanix was recognized as a major player in the IDC MarketScape Worldwide Distributed Scale-Out File System 2022 Vendor Assessment and was also named Customer’s Choice in Gartner’s Peer Insights program for both hyper-converged infrastructure and files and systems object store [Phonetic].

We are especially pleased with our strong performance in the customer revenue-driven Peer Insights program, which we see as a reflection of our obsession with delighting our customers.

Now, I’d like to talk about our recent progress on another one of my priorities, developing and attracting talent. First, following Duston Williams’ decision to join a pre-IPO startup after eight productive years with Nutanix, we promoted Rukmini Sivaraman, previously our Senior Vice President of Financial Planning and Analysis to be our new CFO, effective May 1st. In the five years with Nutanix, Rukmini has been instrumental in the Company’s growth and transformation while developing a unique understanding of our company and industry.

I see Rukmini’s appointment as a great example of the deep bench of talent we have cultivated at Nutanix and believe our financial, strategic, operational and human capital expertise will be a valuable asset as we continue to execute towards our long-term growth and profitability goals. Please join me in welcoming Rukmini on our first earnings call in a new role.

Second, I’d like to highlight the recent appointments of Mandy Dhaliwal as our new Chief Marketing Officer, and Shyam Desirazu as the new Head of Engineering. Both Mandy and Shyam are exceptional leaders with proven technological savvy and unique insight into what it takes to build and deliver industry-leading solutions.

I see our ability to attract and develop such high-quality talent as reflecting belief in the opportunity that’s in front of us and feel confident that we’ve got a team in place to take Nutanix to its next stage of profitable growth.

In closing, in our third quarter, we delivered another quarter of solid growth, exceeding all of our guided metrics. We continue to see solid adoption of our Nutanix Cloud platform from customers choosing Nutanix to modernize their infrastructure and enable their transition from on-prem to hybrid multi-cloud operating models.

And we continue to execute well on our building base of subscription renewals, which we see as a reflection of both the strength of our team and our customers’ high level of satisfaction with our products. While I’m disappointed with a weaker Q4 outlook due to the aforementioned supply chain and sales rep headcount issues, we don’t believe our reduced outlook is a reflection of any change in our market opportunity or demand for our solutions.

That said, we are focused on mitigating the impact of these challenges and continuing to drive towards profitable growth.

And with that, I’ll hand it over to Rukmini Sivaraman. Rukmini?

Rukmini Sivaraman — Chief Financial Officer

Thank you, Rajiv. I am honored to join you all today for my first Nutanix earnings call.

Getting directly to Q3 performance, Q3 was a solid quarter, and we beat all our guided metrics. ACV billings was $205 million, representing a year-over-year growth of 28%, exceeding our guidance range of $195 million to $200 million.

Our renewals business continues to do well, and the ACV billings upside in Q3 was due to renewals performing better than expected. Gross retention rate, GRR, was in line with our expectations. Revenue for Q3 was $404 million, representing year-over-year growth of 17%, exceeding our guidance range of $395 million to $400 million.

Growth in ACV billings was greater than growth in revenue, because orders with future start dates that are booked and collected are reflected in ACV billings, but revenue can only begin to be recognized in the quarter of the actual license start date and also because of slight term compression from 3.3 years in Q3 ’21 to 3.2 years in Q3 ’22.

ARR at the end of Q3 was $1.114 billion, growing at 46% year-over-year. Q3 sales rep productivity was in line with our expectations. However, we ended Q3 with fewer reps than planned as the talent market remained highly competitive. As Rajiv mentioned, we saw rep attrition worse than in Q3, resulting in lower-than-expected rep headcount entering Q4. Under the leadership of our new Chief Revenue Officer, Dom Delfino, our sales leaders remain focused on getting rep headcount to our target level via both better retention and increased hiring efforts.

Our overall company headcount grew slightly in Q3. We added 586 new logos in Q3, which is largely in line with our historical seasonal trend in new logo additions from Q2 to Q3. As we’ve discussed in previous quarters, our sales teams continued to focus on higher-quality new logos, which was reflected in year-over-year growth in new logo ASP in Q3.

Non-GAAP gross margin in Q3 was 83.3%, ahead of our guidance of approximately 82%. Non-GAAP operating expenses for Q3 were $342 million, lower than our guidance range of $365 million to $370 million. This is a result of continued diligence on expense management and hiring that was a bit slower than planned.

Non-GAAP operating margin for Q3 was negative 1%, which reflects our continued focus on operating leverage as we progressed toward our goal of achieving sustained operating profit. DSOs were 40 days in Q3, up from 36 days in Q2. Free cash flow in Q3 came in at a negative $20 million and was impacted by worse-than-expected linearity of billings.

We closed the quarter with $1.3 billion in cash and short-term investments, up slightly from $1.29 billion at the end of Q2.

Before we move to Q4 guidance, I will make a few comments regarding the supply chain. Nutanix transformed that appliance model to a software model starting back in fiscal year ’18 and saw our non-GAAP gross margins grow from the low-60s to our current levels of around 83% in Q3.

Our customers run our software on their choice of hardware, which they purchase from server providers, many of whom are our partners. Because we are an infrastructure software provider, customers often prefer to time their purchase of software from us with the purchase of the underlying server from hardware providers. This means that when there are delays in server availability from hardware providers, customers may choose to either, one, line up the software subscription license start dates with the expected availability date for the servers, leading to us receiving orders with start dates in future quarters, or two, in some case cases, delay their orders until the hardware becomes available.

During the last several quarters and until late in Q3, we had experienced minimal impact from supply chain issues. While we have not seen a change in the demand for our solutions, we saw these supply chain challenges impact us late in Q3, which limited our upside in Q3, and we expect these trends to continue in Q4.

With that, the guidance for Q4 is as follows: ACV billings to be between $175 million and $185 million. Revenue to be between $340 million and $360 million, non-GAAP gross margin between 79% and 80%. Non-GAAP operating expenses between $360 million and $365 million and weighted average shares outstanding of approximately $225 million. The significant majority of the impact on our Q4 ACV billings guidance relative to our previously implied guidance for Q4 is due to the impact of increased supply chain challenges, which, as I described earlier, affects us in two ways, one, future start date, that is orders that customers book with us but that are not yet collected; and two, customers choosing to delay placing orders with us, pending the availability of hardware.

Our guidance is also impacted by sales rep headcount going into Q4 being lower than planned. Because of the increased uncertainty in the macro supply chain environment we saw towards the end of Q3 and continuing into Q4 and how rapidly it is changing, we are widening our ranges to reflect that increased uncertainty.

The guidance assumes that the supply chain challenges continue to worsen in Q4. Absent the supply chain issues, we believe that we would have likely been at or close to our previously implied Q4 ACV billings guidance range. The Q4 revenue guidance is more impacted than ACV billings guidance relative to their respective previously implied Q4 numbers because orders with future start dates that are booked and collected are reflected in ACV billings but are only reflected in revenue in the quarter of the actual license start date.

Our average contract term length is expected to be flattish in Q4. The Q4 operating expenses guidance is well below the previously implied Q4 guidance of approximately $400 million even though it includes about $6 million for an in-person sales enablement event that was moved into Q4 from Q3.

Because of the billing dynamics and because we expect linearity in Q4 to remain challenging due to supply chain delays, we expect working capital needs to increase in Q4. As a result, we expect cash usage to be significant in Q4 and higher than the current Q4 Street consensus.

Moving on to full year revenue. The guidance for fiscal year ’22 is as follows: ACV billings to be between $735 million and $745 million, representing year-over-year growth of 24% to 25%; revenue of $1.535 billion to $1.555 billion; non-GAAP gross margin of approximately 82%; non-GAAP operating expenses of between $1.402 billion and $1.407 billion.

As a reminder, full year ACV billings is not a straight summation of the four quarters ACV billings because of the adjustment required for transactions with less than one-year term length. The guidance above assumes that annual ACV billings guidance is 94% of the sum of the four quarters of ACV billings.

While our Q4 outlook is lower than our prior implied guidance, we remain focused on profitable growth and continue to prioritize working towards sustainable free cash flow generation and non-GAAP operating margin breakeven in fiscal year ’23. We will look to provide more color on fiscal year ’23 expectations during our Q4 and fiscal year ’22 earnings call in August.

With that, operator, could you please open up the call for questions, please? Thank you.

Questions and Answers:

Operator

Absolutely. [Operator Instructions]. The first question comes from Wamsi Mohan with Bank of America. Please go ahead.

Rutu — Bank of America Merrill Lynch — Analyst

Hi, thank you for taking my questions. It’s Rutu filling in for Wamsi today. Rukmini, congrats on the new role. Look forward to working with you. My first question is for Rajiv. There were — the two things that impacted you in the quarter, you said, were the attrition more than expected of the sales reps and the supply chain issues that impacted hardware availability. Rajiv, do you think these are things that will resolve in the fiscal fourth quarter, specifically when we think about sales rep, I’m assuming you’re going to try and replace them, but given the labor shortages, do you think that you can make up the required sales reps in the quarter? And the same question on the supply chain delays, how long do you think this will last? And so should we expect that going into fiscal ’23, these effects linger on into fiscal 1Q as well? So, just your thoughts on the timing on when you can replace the reps as well as on the hardware issues that you’re seeing?

Rajiv Ramaswami — President & Chief Executive Officer

Yes. So, Rutu, that — so first of all, let me start with the supply chain because that was the biggest contributor, right? The vast majority of the lower outlook is because of supply chain hardware constraints. And we saw this really start to come in play very late in the last — in Q3. Now, if you look at that, I mean, until — again, really until now, we were managing that, right? We didn’t have — we didn’t experience any real issues from supply chain, but of course, late in Q3, this started to become much more significant with orders being delayed.

Now with respect to the supply chain, we are working very closely with our hardware partners to try and improve the availability of hardware. But keep in mind that we have one step removed, right, because we don’t directly supply the hardware. So the ability to influence them is somewhat limited.

Now that said, based on what we are hearing from all the server manufacturers and our hardware partners, we expect that these challenges in the supply chain are likely to persist for multiple quarters. Now on the rep headcount, which was a smaller — much smaller component of the issues that we’re facing, now we’ve been affected by the broader industry trend of greater resignations across the board, right? And we noted in prior quarters that we were somewhat behind our rep headcount targets. Now in the third quarter, after two quarters of improving attrition, we saw a quarter-over-quarter increase in rep attrition. That led to a lower-than-expected rep headcount entering the fourth quarter. Now in terms of what we’re doing about that, right, so specifically with — our new CRO, Dom Delfino, is very focused on three things, right, rep retention, productivity of the reps and hiring.

Now on rep retention, we are continuing to refine our segmentation and coverage model. And what that will do is it will result in improved territory coverage and higher level of quota attainment. And that’s in progress and we expect to really have that ready to go by the first part of — as we move into our next fiscal year.

On the rep productivity, we are doubling down on training and enablement. We are leveraging partner-based selling, and of course, implementing the simplified product portfolio. On the hiring side, since Q3, we’ve increased our recruiting efforts even more about previous levels. And we are seeing early encouraging results, right, that in terms of getting us back to where we’d like to be in terms of the sales rep headcount.

So, I think, if you see, we’re working on both of these issues, right? And I think the supply chain is going to last a few quarters, right? I don’t know multiple quarters. We don’t know yet, right? And on the rep headcount, we’re working hard to get that remedy ASAP.

Rutu — Bank of America Merrill Lynch — Analyst

Okay. Thanks for all the details, Rajiv. Maybe just another question for you. The new customer count this quarter was 580 new customers. I know in the past, you’ve talked about focusing more on quality versus quantity. I think the average, if I look at from 2Q to 3Q over the last couple of years, I think it’s been around 700. So, I mean, are you happy with this level of customer additions and given the issues with the sales force, should we focus less on the number of customers that are being added in the next couple of quarters? Do you think that becomes less meaningful of a metric? And should we focus more on things like ACV billings or some other metric?

Rajiv Ramaswami — President & Chief Executive Officer

Yes. So, Q3 is seasonally weaker than Q2. And we saw a decline roughly in line with historical seasonality in the third quarter, when it came to new logos. Now as you indicated also, we have been focused on higher quality, higher ASP new logos more so than absolute new logo count. And on that front, we saw a solid year-over-year new logo ASP growth in Q3, which is what we’re driving for. So, if you look — go forward, we expect a new logo growth to be driven through enabling more partner-based selling, continuing to drive our partner autonomy program, trying to get more leverage from our strategic partners and by continuing to make sure that we have the right sales incentives in place. So, yes, we are focused more on new — the quality of these logos going forward and the ASPs that we can capture.

Rutu — Bank of America Merrill Lynch — Analyst

Got it. Thanks so much. And let me just sneak one more in, if I could, for Rukmini. I think you had guided average contract term to be flat. I think it went up a little bit from 3.1 to 3.2 years in 3Q. I think you’re guiding flat again for fiscal 4Q. How do — how would you say that the growth in your renewables business, how would that be impacting both the ACV billings seasonality as well as this average contract terms? And should we expect that after 4Q, 1Q average contract term will decline given that the federal business is a more significant part of your revenues in that quarter. So, any thoughts you have on the growth in the renewables business and how should we think about the seasonality of ACV billings as well as the trend in the average contract term? Thank you.

Rukmini Sivaraman — Chief Financial Officer

Yeah. Thank you for the question. So, on — to first answer your question on the contract terms, so I think this quarter in Q3, we had a couple of significant transactions that came in at higher terms, so that’s only for [Phonetic] 3.2. But I think more generally, I’d say at this point, we are quite close to sort of what we think was where terms will eventually settle, which is around the 2.8 to 3 year mark, which we had laid out previously. So we’re quite close to that level, right? So, it fluctuates a little bit as you’re seeing, I think, here and what we are projecting for Q4 as well. And we expect that to again maybe trend down slightly, but not too dramatically at this point, given where we are and how close we are to the sort of where we think we’ll settle.

I think your second question was on the seasonality as it relates to renewals and what that does for ACV billings, and what I think in renewals, as we talked about, I think, on the — in the prepared remarks, right, renewals just continues to perform really well for us overall. And I think what it does is we do see the available to renew or ATR, which I think we talked about before on these calls, does go up in general over time, as the base of renewals continues to build. So, I would say that renewals in general is less seasonal than new ACV overall. But as you can imagine, right, renewals is just at this point, an outflow of when those orders came in going back, right? If the new business that we booked three years ago, two years ago, is — has that seasonality, the available to renew also has some of that seasonality, right? So, it’s not perfectly correlated, but I hope that answers your question that overall, I think our renewal business is doing really well. We’re seeing slightly less seasonality in that business than [Phonetic] what new business did a few years ago, which is somewhat seasonal between the quarters, right? So, this is our first sort of full year of renewals, and so we’ll continue to watch that closely.

Rutu — Bank of America Merrill Lynch — Analyst

Thanks for all the details. Appreciate it.

Operator

Thank you. The next question comes from James Fish with Piper Sandler. Please go ahead.

James E. Fish — Piper Sandler — Analyst

Hey, guys. Thanks. I want to continue on the supply chain challenges. Is there — appreciate the color you just gave, but is there a way to think of the backlog you now have that should come in when supply comes back? Or put another way, is your backlog up by roughly the $90 million that you had to guide down for fiscal Q4, understanding there’s multiple ways here of how orders get booked or delayed? Are you expecting that $80 million, $90 million then to come in during all of fiscal ’23? And do you think the persistence of these issues actually persist long enough that puts your $300 million to $500 million free cash flow guiding the out year at risk?

Rukmini Sivaraman — Chief Financial Officer

Thank you, Jim, for that question. I can take that, Rajiv. So, a couple of thoughts, and maybe I’ll add a little more color to what we said about supply chain. So, as you’ll recall, one of the things we said was a significant majority of the Q4 ACV billings guidance relative to what was implied at our previous quarter when we guide for Q3 and for full year, the significant majority of that delta is coming from the supply chain challenges, and it shows up in two ways. One is orders that come in and have future start dates, they’re booked but have future start dates or they don’t get booked because customers are waiting for the availability of the hardware. And the way we thought about trying to estimate Q4 is we looked at the percentage of our orders in Q3 that came in with future start dates. And as Rajiv talked about and I talked about, we saw late in Q3 that the percentage of those orders that came in with future start dates went up. And what we are modeling for Q4, we are modeling that percentage of our orders to come in with future start dates to go up to increase or to worsen compared to what it was in Q3. So that’s how we — that’s how we’ve approached estimating Q4. And I do want to make the point, I think, to your question, Jim, on the revenue piece, right? So, if it’s booked and we’re able to collect it, it does show up in ACV billings, and we do that even with orders with future start dates. Whereas in revenue, even if we have booked and collected it, it doesn’t show up in revenue until the actual date of the license starting. So, those are some of the sort of the nuances there. And to answer your question, Jim, on backlog and deferred and so on, right? So, because of this effect of these increased percentage of orders coming with delayed start dates, we do expect to build some deferred revenue and backlog. But until supply chain starts to improve, and we see that percentage start to decrease, we would really not expect to sort of see that upside or that same magnitude kind of show up in our top line just yet, right? So, that’s how I would characterize thinking about backlog and deferred revenue.

James E. Fish — Piper Sandler — Analyst

Got it. And just on that $300 million to $500 million free cash flow, is that still on the table here? I know that’s far out, but…

Rukmini Sivaraman — Chief Financial Officer

Yeah, thank you for reminding me of that. So I think what we’re — we are in the process of planning for fiscal ’23, as you can imagine. But we are anticipating exiting fiscal ’22, below our earlier expectations and all the increased uncertainty we’re seeing in respect to the supply chain. So we are not in a position right now to affirm those targets we provided, Jim, but we do plan to update our view more generally for ’23 specifically in the Q4 earnings call. However, I will say, and I think it’s worth emphasizing this, that we remain focused on profitable growth and continue to prioritize working towards sustainable free cash flow generation and non-GAAP operating margin breakeven in fiscal ’23.

James E. Fish — Piper Sandler — Analyst

Okay. Fair enough. My follow-up would be on actually the new packaging modules. How should we think about the rank order of these new packaging modules that are being adopted? And after the primary one, what factor or two are [Phonetic] coming in second or third? I know it’s very early, but in what kind of time frame are you expecting to get that second or third add-on, especially as we’re one quarter into kind of the new packaging? Thank you.

Rajiv Ramaswami — President & Chief Executive Officer

Yeah. So, Jim, I’ll take that one. It’s still early, but the initial rollout here has been pretty good, right? So if you look at — the largest deal of our quarter last quarter was from an EMEA-based financial services company. And this was presented by the use of our new solutions-based pricing. And by the way, in that case, they essentially bought the entire portfolio, right? The full Nutanix Cloud Platform, all of it. Now more specifically, right, a couple of things we’ve been seeing. First is more rapid closure of deals, right, utilizing this new pricing and packaging. And second, to your question on add-ons, we are seeing a notably higher attach of Nutanix Cloud Management solution to our Cloud Infrastructure solution. So at least the new solution packaging continues to be adopted on an increased pace and we expect to see, again, higher velocity transactions and more attach of our portfolio products, which should help in the productivity of our sales reps and our partners.

Operator

Thank you. The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Meta Marshall — Morgan Stanley — Analyst

Great. I wanted to just kind of briefly touch on stock-based compensation as a part of attrition. And just, you noted that you were seeing kind of larger-than-expected attrition, was stock-based comp any part of that just given the recent valuations kind of across a lot of names, are there any efforts or adjustments that you guys are planning on making as part of kind of increasing retention of sales reps? And then clearly, it sounds as if kind of the core underlying business is seeing some similar trends. But just whether in any region or any particular vertical, you’ve seen any kind of slowdown in activity just given macro would just be helpful. Thanks.

Rajiv Ramaswami — President & Chief Executive Officer

Yeah. So, I think on the first — there are two questions there, Meta. On the first one, look, I think it’s an overall statement around compensation overall, right? That includes, of course, equity and it includes cash compensation. There’s clearly some inflationary pressure on that, right? And stock price, of course, that has [Indecipherable] more salespeople are very much focused on quota attainment. And a lot of it, therefore, is focused on enabling them to achieve quotas. And so we have — that’s the work that we talked about when it came to the segmentation, better segmentation, better coverage models, better training, getting them leveraged through partners, all of that helps from a retention perspective because ultimately, it gives them a much better shot at achieving or overachieving their quota, right? So, I think that’s what we are really focused on there. We’re also factoring in some degree of inflation in our wages. This — as we move forward, we are factoring that into our conversation plans. The other thing that I do believe is that some of the companies that we compete with for talent, especially start-ups, may be increasingly focused on conserving cash and slowing down hiring in this current environment, which should actually help us.

And the second question, I think, was on demand and whether we are seeing any changes in demand around verticals and so forth. I would say overall, our demand remains solid, but our ability to execute against it is being constrained by these supply chain issues, which are causing delayed start dates and delayed orders and to some extent, the shortage of reps as well that we need to focus on hiring back. Overall, on a demand perspective, we haven’t seen any notable changes in customer spending. But, we are watching the demand and macro backdrop quite closely. Our fundamental demand is driven by accelerating digital transformation, customers modernizing legacy three-tier infrastructure, running all forms of workloads including performance or into databases and mission-critical workloads on our platform and extending to the public cloud. So, we talked about a few customer wins during our prepared remarks, right, that highlight these.

Meta Marshall — Morgan Stanley — Analyst

Got it. Perfect. Thank you.

Operator

Thank you. The next question comes from Nehal Chokshi with Northland Capital Markets. Please proceed.

Nehal Chokshi — Northland Capital Markets — Analyst

Yeah. Thank you. During the quarter, did you start to notice higher-than-expected sales rep attrition?

Rajiv Ramaswami — President & Chief Executive Officer

Sorry, Nehal, could you repeat the question, please? I couldn’t catch it.

Nehal Chokshi — Northland Capital Markets — Analyst

Yes. When in the quarter as you start to notice a higher-than-expected sales rep attrition rate?

Rajiv Ramaswami — President & Chief Executive Officer

Very, very late in the third quarter, right, literally the last couple of weeks in the quarter, Nehal.

Nehal Chokshi — Northland Capital Markets — Analyst

Okay. So sales and marketing, that expense line item was down 10% year-over-over and I think 9% below where I think most analysts were — so would it be fair to say that your sales rep headcount ended up much lower than the 10%. I mean, where is your sales rep headcount relative to your expectations? Is it 10% lower or is it 20% lower, 30% lower? Can you give us some indication here? What’s the magnitude here is?

Rajiv Ramaswami — President & Chief Executive Officer

Yeah. We have not quantified exactly where we are at. We are — let’s call it, we’re slightly below where we would like to be. And we are doing everything we can to get it back up to where we want it to be going into next fiscal year.

Nehal Chokshi — Northland Capital Markets — Analyst

Got it. Understood. Okay. [Speech Overlap].

Rukmini Sivaraman — Chief Financial Officer

Sorry, Nehal, I wanted to add one point there, if you were referring to just sort of the Q3 sales and marketing line item, I did mention this in my remarks, but in case, I just want to highlight that there was about $6 million in opex within that line item that was supposed to be in Q3, the sales enablement in-person event that got moved from Q3 to Q4. And so that’s now in the Q4 number in the guidance we gave for Q4, but it was not in Q3. I just wanted to point that out as well.

Nehal Chokshi — Northland Capital Markets — Analyst

Right. Yes, very good point. Okay. And then in terms of sales attrition often it is correlated to a weakened — demand outlook as salespeople tend to flock towards where there is demand and away from where there is a weak demand. So, pushback on that natural correlation that tends to be out there.

Rajiv Ramaswami — President & Chief Executive Officer

Yeah. I think, look, our — again, I think part of this is, like I said, focusing in terms of making — refining our coverage model, refining our segmentation, to make sure that our sales reps can hit that number, right? Basically, sales reps need to hit their numbers and give them every ability to do that. I don’t believe it’s a reflection of demand, right? The environment is also competitive, right? We’ve had — our sales reps typically go, the ones at a trip end up going, in many cases, to these — start-ups, right, in the promise of quick IPO riches. And some of that, of course, is starting to potentially moderate at this point as well. So, I don’t believe this has anything to do with the demand or the ability to — for them to go achieve their numbers.

Nehal Chokshi — Northland Capital Markets — Analyst

Great. Great. Thank you for taking my questions.

Rukmini Sivaraman — Chief Financial Officer

Yeah. Thank you, Nehal, the other thing I’d add to that rep point is our rep productivity was in line with expectations in the quarter. And if you recall, in the past, you said we expect rep productivity to go up over time. So, that was in line with what we expected, which means that our reps are productive in terms of bringing in and closing deals. That said, we absolutely are keeping our ear to the ground on demand.

Nehal Chokshi — Northland Capital Markets — Analyst

Awesome. Thank you.

Operator

Thank you. The next question comes from Rod Hall with Goldman Sachs. Please proceed.

Rod Hall — Goldman Sachs — Analyst

Yeah. Thank you for the question. Welcome aboard, Rukmini. Good to have you aboard or I guess aboard with the markets anyway. So first question I had for you is your comment on the renewals and the deviation on ACV billings kind of representing upside to your expectations on renewals? I wonder, if you could say a little bit more about that. Are you talking about the high end of the ACV billings guidance range and then what you actually printed so $5 million? And then that, I’m just kind of trying to triangulate into the renewals number from that comment. I wonder, if you could give us a little bit more color on that. And then I have a follow-up question.

Rukmini Sivaraman — Chief Financial Officer

Thank you, Rod. I appreciate that. Yeah, so on — as we said, I think just to emphasize what we said, we said the outperformance in Q3 on ACV billings was due to our renewals performance, right. And I think as we’ve said, we said this last quarter, our renewals business continues to do really well. And they have largely not been impacted by the challenges that we’ve talked about in this call, right, on the supply chain side and on overall rep headcount. Those are predominantly affecting our new ACV outlook. So, that all said, we don’t provide the split of new ACV, which is renewals on a quarterly basis, so I won’t give that, Rod. But hopefully, that gives you some color on what I meant when I said outperformance for Q3 and renewals doing well.

Rod Hall — Goldman Sachs — Analyst

Okay. Thanks, Rukmini. And then following up that, I guess, just a little more color since there’s not really an answer there. On ATR, we were modeling the lower seasonality, obviously, for the quarter. And we would guess that seasonality on ATR is about double — a little bit more than double what it was. If you look at quarter-on-quarter development of ATR, a little more than double what it was this quarter, next quarter on quarter-on-quarter growth terms. Is that in the ballpark for ATR?

Rukmini Sivaraman — Chief Financial Officer

So, can you make sure I understand? So, what exactly is double in your estimation?

Rod Hall — Goldman Sachs — Analyst

The quarter-on-quarter growth rate. So, when we talk about seasonality, we’re talking about ATR this quarter at fiscal Q3 over the quarter before. And so if we look at fiscal Q4 versus fiscal Q3, we’d say it’s kind of a little more than double what it was in fiscal Q3, but I just — I would like to triangulate that and make sure that we’re kind of in the ballpark at least on that.

Rukmini Sivaraman — Chief Financial Officer

Yeah, it’s not that high. The delta is not double. The growth is not double, Rod, right? There is, as I said, Q4 does have a higher ATR than we had going into Q3, but there’s also, I think, the dynamics we talked about last quarter where there were some dynamics of early and so on, right? So, it’s not nearly that large.

Rod Hall — Goldman Sachs — Analyst

Right. Right. That’s the trouble with water-falling [Phonetic] this stuff out. And then I had — thank you for that and Rajiv, I wanted to come back to you and just ask on the hardware attach, can you guys — can you quantify how much of the new software license you’re selling are attached to hardware versus not? Is there any way to — is it most all of it, or is there a proportion of it that really isn’t attached to the necessity to ship a piece of hardware along with the software license?

Rajiv Ramaswami — President & Chief Executive Officer

Yeah. By the way, I mean, to be clear, we are not shipping the hardware, right? So, we’re getting just the software.

Rod Hall — Goldman Sachs — Analyst

I know that. I’m saying for a customer to take delivery of the new piece of hardware along with the software license, just to be clear, we understand your model.

Rajiv Ramaswami — President & Chief Executive Officer

No, I understand your question, Rod. So, it’s hard for us to actually have a pretty view on that. First of all, renewals are all software, right? Renewals are largely independent of hardware, right, pretty much. So, people, once they have a software license from us, they’re likely go to renew that on the same hardware. So, that largely decoupled and our renewals businesses are not being impacted by all the supply chain or hardware issues. So, really, it comes down to the new orders, right? And out of those new orders, yeah, some of those are tied to customers buying hardware, in fact, in good chunk. And some of it is just them buying software and they may already have hardware available, right, and then is just buying software to go run in the hardware. So, it’s hard for us to tease apart and make a clear pattern on much of that. It tends to vary also. So, we don’t have a specific proportion that I can tell you, right, what portion gets to be just software only [Technical Issues] of the delay in hardware availability.

Rod Hall — Goldman Sachs — Analyst

Okay, all right. Thanks very much.

Operator

Thank you. The next question comes from Erik Suppiger with JMP Securities. Please proceed.

Erik Suppiger — JMP Securities — Analyst

Yeah, thanks for taking the question. I guess, I was just trying to understand, your customers have some pretty good flexibility in terms of the different platforms that they can choose from. Why weren’t they able to migrate from one platform that had supply chain constraints to another?

Rajiv Ramaswami — President & Chief Executive Officer

Yes. And by the way, this is a good question. And exactly, — look, until last quarter, this is exactly what we were managing, right? And people were — had the flexibility. But the problem here is, essentially, we’re seeing future start dates across many, if not most, of the several platforms that we partner with. So, it’s not an isolated issue, and it’s not like our customers can go to a different hardware supplier and get what they want. It’s an across-the-board [Technical Issues] hardware providers that we are partnered with, or how our customers running our software on.

Erik Suppiger — JMP Securities — Analyst

Can you give us a sense? I mean, is it the majority of hardware solutions at this point that are seeing constraints?

Rajiv Ramaswami — President & Chief Executive Officer

The constraints are different across different providers. It’s not just one item that’s causing supply chain issue across all the providers; different providers seem to have different constraints in their supply chain. But it seems to be pretty much across all our major partners, we are seeing this.

Erik Suppiger — JMP Securities — Analyst

Okay. And is the largest partner at this point is still Supermicro?

Rajiv Ramaswami — President & Chief Executive Officer

We have — the business at — Supermicro is still very significant for us, but we do a fair amount of business with HP. We still do a fair amount with Dell, right, Lenovo, and then we have smaller players like Fujitsu and others.

Erik Suppiger — JMP Securities — Analyst

Okay. Thank you.

Operator

Thank you. The next question comes from Aaron Rakers with Wells Fargo. Please proceed.

Jake — Wells Fargo Securities — Analyst

Hi. This is Jake on for Aaron. Thanks for the question. Could you talk a little bit about the competitive landscape and maybe what’s giving you the confidence that you’re not seeing some increased competitive dynamics versus likes of say, VMware or others or maybe a shift in applications in the public cloud?

Rajiv Ramaswami — President & Chief Executive Officer

Yeah. So, first of all, in terms of our win rates in 3Q, we saw actually a year-over improvement year — improvement in our win rates, both against our largest competitor as well as against legacy three-tier solutions. So, that I think is actually going well, right? And we are much more focused on that. Now, with respect to the cloud itself, I don’t think the dynamics there have changed, right? I mean the people are continuing to use the cloud for new applications, but we also — they’re also looking at a world where that is hybrid and multi-cloud and workloads are running everywhere, right? And so, we don’t — I mean, the dynamic of moving to the cloud has been there for a while. And we don’t think that’s changed significantly in any sense recently. And we are participating in that, right, but some of the examples that we’ve been showing, right, with our solutions in AWS and soon to be in Azure. So, we are participating in that cloud journey as well, with our customers. So, we haven’t seen any significant changes on that front. And on the on-prem side, I would say, our win rates [Technical Issues].

Jake — Wells Fargo Securities — Analyst

Okay, great. And then, maybe just as a follow-up, you guys noted demand remains pretty strong. What about visibility, especially in the enterprise space? Are you having any major changes in visibility?

Rajiv Ramaswami — President & Chief Executive Officer

I think the biggest question around visibility is, when we have a set of opportunities in the pipeline, when is that going to be realized in orders? And what is — how much is it going to come in with future start dates? That’s the part that we don’t know, right? And we have been assuming that part of it is actually getting worse this quarter compared to last quarter. So, the fundamental [Technical Issues] fundamental demand from our perspective has not changed. But what point can the demand be realized, right, with these hardware issues on.

Jake — Wells Fargo Securities — Analyst

Okay. Great. Thank you.

Operator

The next question comes from Simon Leopold with Raymond James. Please proceed.

Simon Leopold — Raymond James — Analyst

Thanks for taking the question. I wanted to see if you had some thoughts as to whether or not the circumstances will cause your customers to accelerate public cloud adoption and potentially make opportunities for on-premise business for you essentially be reduced, given that if they’re facing these kinds of challenges [Technical Issues] regardless of who the supplier of the software is, does that accelerate public cloud adoption?

Rajiv Ramaswami — President & Chief Executive Officer

Yeah, that’s a good question. First of all, I will also say that public cloud providers also have to deal with hardware issues, right? They have to deal with their [Technical Issues] cloud is a strategic initiative for our customers, right, so, customers are thoughtful about figuring out what they want to do with the cloud. And it’s not largely, we [Technical Issues] just because they can’t get hardware temporarily on-prem, right? So, clearly, people have been going to the cloud for new applications. And for customers who have the Nutanix platform, we provide a very quick and simple way for them to move to the cloud, [Technical Issues] move to the cloud using our platform, and run on public cloud hardware, so we haven’t seen a lot of that happening yet, right? Because what customers decide is, they decide what applications they are going to run on-prem and what applications they are going to run in the public cloud. And those applications that they are on on-prem, they have good reasons to run on-prem, right? They might be systems of record or they might be mission-critical applications. So, they may have data privacy or locality issues. So, it’s not easy for them to just take all of those and take it to the public cloud, right? So, they have been thoughtful. So, next, I think the answer to your question, Simon, is no, we haven’t seen this as a reactive measure of people going more to the public cloud because they can’t get hardware on-prem.

Simon Leopold — Raymond James — Analyst

Great. And then as a follow-up, when you’re thinking about your strategy for rebuilding the sales reps, do you think about trying to essentially hire experienced sales reps, which potentially cost more money or alternatively grooming and developing new sales reps, which may cost less, but take more time. How do you think about that trade-off in the rebuilding process?

Rajiv Ramaswami — President & Chief Executive Officer

Yeah. I think it’s a combination of both, right? I mean it’s not one or the other. So, clearly there’s a combination of people we are hiring with the experience and with the skillsets. Last year, for example, we graduated many of our inside sales people to become account reps as part of their own career development. And so, that’s another thing that we have done in the past and provide a career opportunity for our people to go from, whether they are inside sales, whether they’re customer success, to potentially taking on a road as an account rep and training them and taking them there forward to combine with hiring. So, it’s both together, it’s not one or the other.

Simon Leopold — Raymond James — Analyst

Great. Thank you for taking the questions.

Operator

[Operator Closing Remarks]