Nutanix Inc

NASDAQ:NTNX

Q3-2025 Earnings Call

[Operator]

Good day, and thank you for standing by. Welcome to the Nutanix Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I will now hand it over to your speaker, Rich Valera, Vice President of Investor Relations. Please go ahead.

[Richard Valera, executive]

Good afternoon, and welcome to today's conference call to discuss third quarter fiscal year 2025 financial results. Joining me today are Rajiv Ramaswami, Nutanix' President and CEO; and and Rukmini Sivaraman, Nutanix' CFO.

After the market closed today, Nutanix issued a press release announcing third quarter fiscal year 2025 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 risks and uncertainties please refer to our SEC filings, including our most recent annual report on Form 10-K and 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'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.

Nutanix will be participating in the Baird 2025 Global Consumer Technology & Services Conference in New York, and we hope to see some of you there. Finally, our fourth quarter fiscal 2025 quiet period will begin on July 18. And with that, I'll turn the call over to Rajiv. Rajiv?

[Rajiv Ramaswami, executive]

Thank you, Rich, and good afternoon, everyone. We are happy to report third quarter results that came in ahead of our guidance. Against a dynamic backdrop, our results benefited from the strength of the Nutanix cloud platform, demand from businesses looking for a trusted long-term partner and go-to-market leverage from our partnerships and programs. Taking a closer look at the third quarter, we exceeded all our guided metrics. We grew our ARR 18% year-over-year to $2.14 billion and delivered strong free cash flow. We also saw another quarter of strong new logo growth with strength seen across all our customer segments.

Our largest wins in the quarter demonstrated our ability to land and expand, which is some of the largest and most demanding organizations from the world as they look to modernize their IT footprint, including adopting hybrid multi-cloud operating models and modern applications as well as those looking for alternatives in the wake of industry M&A. A great example is a new logo and our largest land and expand win of the quarter with a Fortune Global 500 provider of technology and services based in the EMEA region.

Our 2-plus year engagement with this customer was catalyzed by their concerns regarding the proposed acquisition of their incumbent infrastructure supplier, which were realized subsequent to the close of that transaction. This new customer was initially looking at Nutanix as a second vendor alternative. But further value of the Nutanix start platform as a way to modernize their existing infrastructure, and ultimately chose Nutanix to replace their entire incumbent supplier over time.

Another good example is a 7-figure expansion we did with an EMEA-based IT solutions provider in the quarter. This customer was an early adopter of our GPT in a box, 1.0 solution along with Red Hat, OpenShift for managing Kubernetes. With this expansion, they're adopting our GPT box 2 solution, including Nutanix Enterprise AI while also replacing OpenShift with Nutanix Kubernetes platform. They see their enhanced platform as providing a centralized infrastructure for accelerated and scalable model deployment and influencing across different sites with initial use cases focused on information summary search as well as that agent and digital assistant solutions.

Finally, a new logo win with one of the largest asset managers in the world based in North America demonstrated the value of the hybrid multi-cloud capabilities of the Nutanix start platform and our partnerships. This customer was unhappy with the recent changes with their existing infrastructure provider and was looking for an alternative that could work across their private and public cloud estate.

They purchased the Nutanix store platform, including NC2 on AWS through the AWS marketplace, appreciating the consistent management self-service and the automation it provides across private and public clouds. Earlier this month, we held our annual .NEXT conference in Washington, D.C. which drew over 5,000 [indiscernible]. During [indiscernible], we made a number of announcements demonstrating our commitment to enhancing the Nutanix cloud platform and strengthening our partner ecosystem. We demonstrated progress on our decision to enable customers to utilize their existing external storage hardware while adopting the Nutanix cloud platform powered by our AHV compute hypervisor.

Our first offering supporting Dell PowerFlex became generally available at the end of April, well within our stated target of the first half of this calendar year. And during [indiscernible], we announced a new partnership with Pure Storage to support their flash array, an offering that is expected to be generally available by the end of this calendar year. We also continue to focus on helping customers build apps and run them anywhere.

To that end, we announced we are expanding our cloud platform to support Google Cloud, which will be in early access this summer. We also announced a new solution, cloud-native AOS, which is about enabling modern applications to be able to use a set of highly resilient storage and data services whenever they're running, whether it's in the public cloud, in native Kubernetes substrates or bare metal. And finally, we announced general availability of a new version of Nutanix Enterprise AI, which adds a deeper integration with NMDA enterprise using their latest framework to speed the deployment of identic AI applications in the enterprise.

In closing, I'm pleased with our solid Q3 results. our ongoing innovation on our cloud platform, particularly with respect to its support of modern applications and external storage and on the progress we continue to make on partnerships. We remain focused on delivering on our vision of becoming the leading platform for running apps and managing data anywhere and capturing the multiyear growth opportunity in front of us. And with that, I'll hand it over to Rukmini Sivaraman. Rukmini?

[Rukmini Sivaraman, executive]

Thank you, Rajiv, and thank you, everyone, for joining us today. I will first discuss our Q3 fiscal '25 results followed by our guidance for Q4 fiscal '25 and what that implies for our updated outlook for the full fiscal year 2025. Results in Q3 came in above the high end of our ranges across our guided metrics. In Q3, we reported quarterly revenue of $639 million higher than the guided range of $620 million to $630 million, representing a year-over-year growth rate of 22%.

The ARR at the end of Q3 was $2.14 billion, representing year-over-year growth of 18%. We continue to see strength in landing new customers onto our platform from the various programs we have put in place to incentivize new logos from a general inpatient engagement from customers looking at us as an alternative in the wake of industry M&A and helped by more leverage from our OEM and channel partners. NRR or net dollar-based retention rate at the end of Q3 was 110% and flat quarter-over-quarter.

In Q3, average contract duration was 3.1 years, slightly higher than our expectations and up slightly quarter-over-quarter. Non-GAAP gross margin in Q3 was 88.2%. Non-GAAP operating margin in Q3 was 21.5% and higher than our guided range of 17% to 18% due to slightly lower operating expenses related to timing of hiring and higher revenue. Non-GAAP net income in Q3 was $125 million or fully diluted EPS of $0.42 per share based on fully diluted weighted average shares outstanding of approximately 297 million shares.

A note on taxes. Historically, we calculated the non-GAAP effective tax rate by considering our sizable U.S. net operating loss carryforwards and tax credit carryforwards. This resulted, for example, in a 6% non-GAAP tax rate for fiscal year '24. Going forward, we believe a long-term projected tax rate of 20% better aligns with the non-GAAP measure of profitability, better reflects our long-term tax structure and provides better consistency across reporting periods. This 20% non-GAAP tax rate is reflected in our statements starting in Q3 '25.

It is important to note that we expect no meaningful change from a cash tax perspective. Our overall cash tax rate is expected to be approximately in the mid- to high single-digit percentage range of non-GAAP profit before tax for the next few years due to our net operating loss and tax credit carryforward balances. GAAP net income and fully diluted GAAP EPS in Q3 were $63 million and $0.22 per share, respectively. Free cash flow in Q3 was $203 million, representing a free cash flow margin of 32%.

Moving to the balance sheet. We ended Q3 with cash, cash equivalents and short-term investments of $1.882 billion, up from $1.743 billion at the end of Q2. Moving to capital allocation. In Q3, we repurchased $38 million worth of common stock under our existing share repurchase authorization and used about $65 million of cash to retire shares related to our employees' tax liability for their quarterly RSU vesting.

Moving to Q4 '25. Our guidance for Q4 is as follows: revenue of $635 million to $645 million. Non-GAAP operating margin of 15.5% to 16.5%, fully diluted weighted average shares outstanding of approximately 297 million shares.

Moving to the full year. And based on that Q4 guidance, the updated guidance for fiscal year '25 is as follows: revenue of $2.52 billion to $2.53 billion, representing a year-over-year growth of approximately 17.5% at the midpoint and an increase from our previous guidance. Non-GAAP operating margin of approximately 20.5%, an increase from our previous guidance Free cash flow of $700 million to $730 million, representing a free cash flow margin of approximately 28% at the midpoint and an increase from our prior guidance.

I will now provide some commentary and assumptions regarding our updated guidance. First, we assume that the macro and demand environment remains similar to what we saw in Q3. We expect to continue to add new customers onto our platform, while noting that last Q4 presents a tough year-over-year comparison for new logo additions. Second, we assume aggregate average contract duration for Q4 to be more or less flat relative to Q3 and resulting in a full year contract duration that is expected to be flat to slightly higher compared to last fiscal year. Third, as discussed in prior earnings calls, we expect to continue to increase our investment in sales and marketing and research and development into the end of the fiscal year. These investments are directed towards addressing our large market opportunity are expected to continue to ramp in Q4 and are factored into our Q4 and implied full year guidance.

In closing, we are pleased that our Q3 results exceeded the high end of our guidance ranges and to raise our full fiscal year guidance across all metrics. We would like to thank our employees, customers, partners, investors and stakeholders for their continued trust in us. 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]

[Operator Instructions] Our first question will come from the line of Jim Fish from Piper Sandler.

[James Fish, analyst]

Of course, I'll kick it off with the [indiscernible] macro question that we're all asking on all these calls. But I guess, can you just walk us through the linearity that you saw throughout the quarter and through May at this point, just given some of the tariff things back and forth, especially in the month of April. And Rajiv, separately from that, you seem to be talking up the next act of the company across platform services like managed Kubernetes. Are we seeing an improvement yet in that sort of contribution on the third wave or act whatever you want to call it, that's traditionally been a smaller part of the business.

[Rajiv Ramaswami, executive]

Yes. The 3 questions in there. I'll talk about macro. We can then talk about your specific question on linearity, I think Rukmini can cover that, and then I'll comment on the Kubernetes piece. So on the overall macro, Jim, it continues to be dynamic, continuing to change every day, and we've seen all these changes and recent actions from the new administration. The other related commentary on the macro is also on the federal business, right? And lot of person changes, people changing in the federal government, more additional revenues. So for us, what that's meant is somewhat longer deal cycles and some variability across our fed business. Now longer term, when you look at the Fed business, we are actually. We will be optimistic on the opportunity for this business to benefit from our platform's focus, we help people modernize and we help companies and organizations reduce [indiscernible] so I think this is clearly a focus, and we can help the customers with this. So we have factored some of this picture when we look at our outlook. Let me also answer the Kubernetes piece and I'll then turn it to Rukmini for linearity. So the Kubernetes piece, of course, I think at our last user conference, we really focused on becoming this platform for applications and data, both today's applications, which are all VM-based. And to all of the applications, which are more Kubernetes based and can be running anywhere. And so our whole focus on Kubernetes is about building the Kubernetes platform -- to align and provide customers a choice of VMs [indiscernible] anywhere. It's still pretty early days for the Kubernetes piece. We're actually quite enthusiastic about the initial progress we are seeing in terms of the product market fit that we've seen with what we've talked about. But it's still early days and the numbers and reduction are still pretty early. If you recall, we really got into this about a year ago with our acquisition of [indiscernible] and we're building out -- we'll continue to build out this platform over the next few years. So the contribution is still small, but growing nicely. Rukmini want to comment on the rest linearity.

[Rukmini Sivaraman, executive]

Sure. Jim. So on a couple of things I'll add to what Rajiv said. So on linearity, look, I'll say more generally on the tariff point, Jim, we -- as a software provider, and as you know, we don't have a direct exposure to tariffs, and we haven't seen an impact from tariffs to date. I will also say that more generally, while linearity can move around from quarter-to-quarter, we haven't seen any meaningful sort of increase in pull-ins or push out more systematically over the course of Q3 other than what Rajiv alluded to, right, in terms of deal cycles lengthening and some variability with regard to the U.S. federal business. specifically. And as Rajiv said, I'll reiterate that overall, we are continuing to be solid demand for our solutions, and that -- but we have factored in some of this overall kind of macro uncertainty into the upgraded outlook.

[Operator]

[Operator Instructions] Our next question comes from the line of Pinjalim Bora from JPMorgan.

[Pinjalim Bora, analyst]

And congrats on the solid quarter. Rajiv, now that [indiscernible] solution is out, it seems like NCIC licensing. Any way to understand the delta between the NCIC and kind of the core standard NCI license. And I know it's early, but what are you seeing around the pipeline for that product at this point? And one follow-up, I'll just spit it out for Rukmini. The operating margin guide is coming up substantially for the year. Maybe talk about what's driving that. Is there an element of timing of expenses that might have been pushed into 2026? Or are you seeing any productive improvement from kind of internal use cases? So I'm just trying to understand the sustainability of that margin levels as we go into '26.

[Rajiv Ramaswami, executive]

Yes. So Pinjalim, let me take the first part on NCIC and [indiscernible] PowerFlex. So yes, we are happy that we were able to get it out at the end of April in line with what we talked about. We said in the first half calendar year, we were able to get it out before. Also at our conference in Washington, you heard some of the early customer feedback on that [indiscernible] was on stage talking about how they were an early access customer for this offering. So now the way we've gone to market is now, yes, as you said, we call it NCIC and what it is, is the offering now includes basically the rest of the platform minus the storage, right? So it includes our hypervisor, includes our networking pieces, like our security microsegmentation offerings. And of course, it includes our full management suite. And what it does not include, of course, the storage because that storage piece the external component. And so that's how we priced it. We still have a standard pro-advanced type of 3 tiers of that licensing structure in there. Now in terms of the opportunity there, of course, PowerFlex is -- there's a limited installed base of PowerFlex, but it's at very large accounts customers like Moody's among others, where there's a large footprint of PowerFlex in those accounts. And our whole strategy with NCIC, this to platform minus the storage offering is to be able to go into those environments and get traction. So we've got -- we have some good early access feedback from our customers. The product is [indiscernible] and so we expect to see some traction with that over the next several months. And really, I think some contribution -- a smaller contribution in FY '26 in terms of actual revenue.

[Rukmini Sivaraman, executive]

I'll take the operating margin question. So you're right, we're happy with our operating margin performance in Q3 and to be able to take up the guide for the full year. And so as alluded to in my prepared remarks, in Q3, for example, I did call out timing of hiring is one of the reasons we overachieved on op margin relative to our guidance. And so yes, some of those people have been hired and will start in Q4, and you'll see that there's quite a meaningful step-up implied in the op margin guide from Q3 to Q4 because we are sort of hiring folks and expect them to start in Q4. We expect to also continue to ramp up the investments in Q4, pendulum, to your question. And that's, of course, because we believe there's a big market opportunity here. And as we talked about before, we're investing in both sales and marketing and on the R&D line as we look to drive more innovation. And the last part of your question was around how do you think about fiscal year '26 and sustainability here. So of course, we'll guide to in in the next earnings call. What I will say though, of course, that all the folks we've hired here will be in the run rate for next fiscal year. And that we've had some really nice margin improvement year-over-year, and that pace is going to be hard to sustain, of course, Pinjalim, going forward. So I'll leave it there, but look, I think we're happy with the ability to drive leverage overall in the model. And as you know, we've talked about those levers at a high level as being continuing improvement of -- not improvement or increase value of renewals mix as a percent of total and that will continue. We have -- we doing more productivity improvements with our sales reps, and we think there's more we can do there. And then overall, kind of prudent investments in areas where we think we can see a return. And so those are some of the areas, and you're right, there is some timing here as well, and we'd expect all of that to be in the run rate going into fiscal year '26.

[Operator]

Our next question will come from the line of Jason Ader from William Blair.

[Jason Ader, analyst]

So 2 questions. First, a quick one for Rukmini. Can you help us understand ARR versus revenue, just given the delta and the growth rates there? Was that a timing thing? Usually ARR growth for you guys has been above revenue growth. So that's the first question.

[Rukmini Sivaraman, executive]

Yes, Jason. So I'll start with a few things on the revenue versus ARR. So the first thing I would say is revenue, of course, is a flow metric, whereas ARR is more of a stock metric. And I think a few other things to call out. So when you think about revenue recognition for us, as you know, Jason, it's not fully ratable. There is a license portion that's recognized upfront and in the support and maintenance portion that recognizes more rapidly over time. Where ARR, of course, represents the annualized view of our installed base, therefore, being more of a stock metric. Now two things can affect the revenue, right? The contract duration, for example, can affect those relative growth rates because revenue is impacted by duration. So longer duration would be in a higher amount recognized upfront for license versus a shorter duration, but as ARR is agnostic of that. And I talked about how contract duration came a bit higher than our expectation. The other factor here is around large deals that can have delayed or phased deployment over time. also resulting in variability. I'll give you one example, a deal we've talked about before is this 8-figure ACV deal that we had booked in Q3 of fiscal year '24, so the year ago quarter. And it was built in -- we collected cash for it in a quarter later. And we said then that the revenue for that transaction is going to come over time. And so for example, there's a significant chunk of that revenue from that transaction that did show up in Q3 -- now that is in both revenue and ARR, but revenue the effect is, of course, more pronounced and more lumpy on revenue given that upfront component. So overall, if we think both revenue and ARR provide useful information about our top line, and that's why we continue to provide both on a quarterly basis. But yes, that revenue number because of the license product commission can be a little more lumpy than ARR. So you could say manual view of revenue is a better measure than purely quarterly.

[Jason Ader, analyst]

Okay. Great. And then, Rajiv, VMware historically did really well with Tier 2 cloud service providers and MSPs as basically a cloud computing platform for those for those companies. We've heard some of those partners are not thrilled with the new licensing. And so I was just hoping you could comment on any progress you guys are seeing with these types of accounts. Is it a target type of account for you? Or are you more focused just on the kind of larger enterprise?

[Rajiv Ramaswami, executive]

Yes, Jason, that's a very good and appropriate question, actually. Because for us, the cloud service provider or managed service providers, the CSP MSP market historically had not been a big focus area for us because we were just focused on working directly with our customers. Now we do think that, that market actually for us, represents a significant opportunity given the big vacuum that's out there now with VMware, as you said, making some of the changes to their licensing model. And so our business with the CSPs and MSPs, while still early, is growing. So we've introduced specific programs for the CSPs and MSPs and in terms of their -- and we've actually added some resources both in the field and centrally to focus on those we are adding also some product capabilities to enable the service providers to deliver multi-tenant offerings. And also, there's another interesting dynamic that's starting to emerge now around sovereign clouds and some of the CSPs, like OVH in Europe that we work with -- are also emerging as building these local sovereign clouds for countries. So all of these represent, in my view, a good opportunity for us to have another route to market and get more leverage. And so we are now starting to focus, like I said, in making additional investments in this space. Early days, but that business is small right now but expecting to grow.

[Operator]

Our next question will come from the line of Meta Marshall from Morgan Stanley.

[Meta Marshall, analyst]

Maybe a couple of questions for me. Just traction that you guys are having kind of with the Dell and Cisco channel partners that you kind of added last year? Just kind of any update on where you're seeing kind of the most traction there. And then next, maybe if you could kind of give some commentary of at your next conference what kind of were the highest just where you were seeing the most activity or customer requests for kind of additional development.

[Rajiv Ramaswami, executive]

So first, let me comment on Dell and Cisco. So first, I think Cisco is a little further along than that because we've had the relationship with them a little longer. There have been a consistent contributor to our new logo growth. And I mean, it's still a minority contribution, but a steady contribution to our new logo growth. Cisco is, again, they have a very broad footprint. And the customers that we are winning with them cover the gamut, they cover large customers, they cover federal customers, they cover smaller customers. They're -- Cisco is quite strong in state and local education as well. So it's a pretty broad spectrum across the board, domestic and international. -- from Cisco. The Dell relationship is a bit earlier. In the life cycle, there's 2 parts to it. There is the HCI component where Dell resell our Asia platform, that's been in the market for a couple of quarters. But I would say that, that's 1 of many solutions that Dell sells. They obviously would lead with their own external storage solutions first and offer up our HCI solution only customers and interest in HCI. But then the second part of the offering, which is PowerFlex. Our solution with PowerFlex, I mean that's very much aligned with Dell selling completely. And so we are -- now that the product is in the market. We are engaging with a large PowerFlex accounts. You heard from 1 of them at at next. So that's, I think, going along well. But it's still -- since the product is just generally available, it's going to take some time for that revenue to build up. Now in terms of Next, I thought it was a very good show for us. We have 5,000 per certainties. We had a good -- I would say 1 of the big things for me was also seeing the partner sponsorships grow. Two years ago, we had about 25 partners sponsoring us at the show. And then this year, we had 86 partners. So that's pretty good growth. And it's a testimony to the broader ecosystem that's building around us. Now on your question around customer requests, I would say, clearly, our customers would like us to support every external storage array that's out there. They want to see how we can make migrations as easy as possible for them. And there were many customers who talked about a migration experience moving from VMware to Nutanix at the conference. So I would say enabling a broader use case for our platform, supporting external storage they have good traction around modern applications in terms of future direction for many of these customers that were there. So I think those are one of the big things for us, operating across a hybrid multi-cloud environment, I think the simplicity. And then specifically, given Washington DC, there was a fair bit of interest also in in us being able to work in air gap or secure environment. And we saw some examples of mission-critical deployments like the U.S. may be talked about how they're using us on some of their ships. So some of these need to be air gap, some of these B secure environments and some of the capabilities that we're bringing on the product also for those environments are helpful, too.

[Operator]

Our next question comes from the line of Ruplu Bhattacharya from Bank of America.

[Ruplu Bhattacharya, analyst]

It's Ruplu filling in for [indiscernible] today. I have 2 questions, one for Rajiv and one for Rukmini. Rajiv, can you talk about the pricing environment? And in fiscal 3Q, can you talk about any share gains and competitive wins versus VMware. It sounded last couple of quarters that Nutanix was gaining some traction in terms of gaining VMware customers. So how did that track in fiscal 3Q? And then Rukmini I'll ask your question at the same time. Can you give us some commentary on how the renewals business did versus land and expand? Maybe talk about the pipeline of large deals and available to renew pool and in years past, you've had some pull-in of renewals. Any chance that, that is happening this year as well? I mean how are things trending? If you can give us any color on these points.

[Rajiv Ramaswami, executive]

All right, good questions. And so first, I'll share gains and pricing environment. Look, I think perhaps the simplest indicator of our traction is in terms of share is perhaps the number of new customers joining us every quarter, right? And again, this quarter was a strong quarter for new logos. We had about, I think, 620 or so. And what's also changing is the adoption, the high-provider adoption. More and more of these customers are starting their journey with the hypervisor. This is certainly not the case 5 years ago. In fact, where more customers were, at that point, consuming our storage along with VMS hypervisor. But these days, all the new logo customers, the vast majority of them are starting their journey with our own hypervisor. And we'll give you some examples during our prepared remarks, we've talked about winning some large customers as well as smaller customers. So these logos are actually across the spectrum of pretty large Global 2000 tech accounts, but also smaller accounts around the world. The pricing environment has been fairly stable. I think we've seen the competitive pricing fairly pushing customers to adopt BCF, the full VMware stack. And we have a more a la carte approach providing what customers want. And they can buy what they want to consume what they want on a very flexible term from us. So we haven't really seen any big changes from a pricing environment perspective.

[Rukmini Sivaraman, executive]

I'll take your second part of your question. on -- for Q3 specifically, we saw good strength in landing new logos as I think Botajivand I mentioned in our prepared remarks, that new logo growth was, again, really strong. I did mention that in Q4, the comparisons start to get harder because last Q4 was -- is when we sort of started to see this base traction with new logos. So happy with that. Expansion was good in Q3 and [indiscernible] were solid as well in Q3. Then I think the second part of your question was around pipeline, what we're seeing with regard to large deals and perhaps available to a new pool. Ruplu on the large deal pipeline, we continue to see a greater mix of larger deals in our pipeline. We've talked about that in the past, and that continues to be the case. And look, we think that will continue to cause some variability from quarter-to-quarter as those deals land. And those are also the ones where we can see occasionally more, say, request for deployment over time, for example, like that example I gave earlier of the 8-figure ACV deal from last year. So we do see that from time to time, and we expect that those will continue in those really large transactions because customers in those instances are willing to make a large upfront commitment. And it's reasonable that they can only consume it, not all at once, but over time. So we're willing to structure transactions in that way. So that's on the large deal side. And then on the available to the new pool, look, I would say that's a number that we have a fairly good visibility on at the start of the year. There are some timing differences, some come in earnings, for example, yes, that I think will continue to be the case. And as we've said in the past, we certainly welcome a customer willing to renew early as long as the economics are favorable because it's a commitment that they're willing to make with us earlier. And of course, we welcome that. And in the ATR number, as you said, will continue to grow. As you can imagine, though, that as that ATR base gets larger and larger, the growth rate of that and naturally, just [indiscernible] numbers will grow slower, but it is expected to continue to grow here as we add more land and expand each year and that ATR grows over time.

[Operator]

Our next question will come from the line of Mike Cikos from Needham.

[Michael Cikos, analyst]

Just to cycle back to the competitive displacements in the VMware Broadcom. Curious, as you guys continue to monitor these deals in your pipeline, is that cohort of deals exhibiting any different behavior versus broader Nutanix pipeline as it pertains to tariffs or the economic uncertainty out there? Or is the -- are deals progressing at a quasi-similar rate? I'm just interested in if you could unpackage that a little bit?

[Rajiv Ramaswami, executive]

Yes. I think the first -- Mike, it's a good question. But first of all, it's very difficult for us to separate these deals. It's not one versus the other, right? I mean we don't have clear sort of delineation between just, hey, this is a VMware displacement opportunity versus a business as usual type B because in every deal, we are against competition. So it's hard for us to really discriminate across these 2 deals. But I would say we haven't seen any substantial different behavioral patterns, I think. I will say that on location, we've seen I mean it depends depending on the customer, and it's kind of more anecdotal than broad based. There are some customers who say, absolutely, I want to get out of VMware Broadcom. And so those customers tend to be more motivated and progressing the deal forward at a more rapid clip and with some sense of urgency. And so I would say that could potentially, in some ways, independent of the macro and the rest of the macro situation happening. But we -- I think these are all to conflated for us for us to really extract separate meaningful observations. Rukmini, do you want to add anything to this?

[Rukmini Sivaraman, executive]

The one thing I'd add, I think, is Mike, your part of your question was, is there any different behavior with respect to tariffs or macro specifically, Mike? And I want to [indiscernible]. With respect to tariffs, again, as a software provider, we don't have any direct exposure to tariffs and haven't seen an impact to date, Mike. And look, the broader matter uncertainty is out there, as Rajiv said, that's sort of intertwined with some other specific situations that our prospects and customers are dealing with. And we factored through all of that as we talk about our updated guidance, Mike.

[Michael Cikos, analyst]

For both of you on that response. And then just a quick follow-up with Rukmini. I know that we cited the timing of the hiring, if I come back to the question that Pinjalim got at. I just want to make sure I'm clear here. So is there an expectation that during this fiscal year, we will have caught up from a hiring standpoint?

[Rukmini Sivaraman, executive]

Well, I would say, look, we are hiring to our plan for this fiscal year. There's been some timing changes I alluded to, between sort of Q3 and some of those folks being hired but starting in Q4. And so that is the intent, Mike, right? So the team -- teams are all have been given out their plans and they're all hiring as rapidly as they can to bring in the right people aboard. So we're certainly driving towards that.

[Operator]

Our next question will come from the line of Nehal Chokshi from Northland Capital Markets.

[Nehal Chokshi, analyst]

Congrats on the strong results, profitability and the guidance on the profitability as well done. On the ARR results, statistically the incremental ARR, which was about flat year-over-year. How would you characterize that relative to your expectations at your Q2 earnings call. And I do know that you don't guide to it, but not also that maybe you can at least discuss how it performed relative to your expectations?

[Rukmini Sivaraman, executive]

Thank you for the question. So as you rightly said, we don't guide to ARR auto net new ARR. And so what I would say is we're happy to sort of see our net NRR, net dollar base retention rate stable at 10%. That, of course, is hard to compare directly to net new ARR. I think the number you're referencing is a quarter-over-quarter incremental ARR NRR, which is more which is more sort of a year number, right? So yes, so we don't really comment on net new ARR, we don't guide to it, but I would say we're overall happy with our outperformance exceeding our expectations and our guidance on both revenue and free cash flow for the quarter and to be able to raise all guided metrics for the full fiscal year.

[Nehal Chokshi, analyst]

Okay. Great. And then why didn't service revenue go down to $1 million Q-over-Q, was there a lot of reduction in the number of days in the quarter so broadcast?

[Rukmini Sivaraman, executive]

You mean Professional Services revenue, Nihal, was that your question?

[Nehal Chokshi, analyst]

No, the maintenance and entitlements of service revenue.

[Rukmini Sivaraman, executive]

Yes. So product versus support and entitlements. Is that the question?

[Nehal Chokshi, analyst]

Yes, correct.

[Rukmini Sivaraman, executive]

Okay. Yes. So look, support actually, I think, grew year-over-year. It grew at a slower pace maybe than you folks are used to see. I wouldn't card anything unusual there that, as you know, that support line item really comes off the balance sheet of the deferred revenue balance on a schedule. So it's not really reflective of anything. There is some -- the old model. We have some life device licenses that are still under support and some of those can move around quarter-to-quarter. So that had a small impact there for Q3 as well, Nehal, you can see [indiscernible] product revenue grew really nicely actually in the quarter. And part of that reason for that is this large deal that I talked about, which had a significant revenue recognition in Q3.

[Operator]

Our next question will come from the line of Matt Hedberg from RBC.

[Unknown Analyst]

This is [indiscernible] on for Matt Hedberg. Congrats on another great quarter. Just one for me. I wanted to touch back on partnerships. Could you double-click on the progress with Dell and Cisco and other conversations with OEMs that you're having as you think about broadening these partnerships? And how should we think about contribution ramping into the second half of calendar year 2025 and into 2026

[Rajiv Ramaswami, executive]

Yes. I think Rukmini, you can help me on the numbers as well. But I think, first of all, I think we continue to focus on expanding our partner ecosystem. And you have to look at them in terms of -- there's multiple aspects when it comes to partner. There's the strategic partners like Cisco, Dell and Pure that you talked about. And some of them actually are also go-to-market partners in the sense that they're reselling our products. So Cisco and Dell are reselling our product. We haven't talked specifics about Pure, the solution is not out yet, but [indiscernible] at the end of the year. So until then, we'll have to wait. Cisco has been in the market for a while. They continue to ramp. They continue to deliver new logos to us. And again, we are focused on incremental business with these folks. Dell has been -- the first part of the Dell solution has been in the market for a couple of quarters. But again, that's not the solution that they tend to favor, right? They'll sell their own solution with external storage first before they fell Nutanix HCI solution. Now that we also have an external storage solution, part 2 of that offering with Dell, which is the PowerFlex. So there, again, the solution is just arrived in market. We are in trials and early engagements with many customers. And so we are seeing -- it's early days, and we expect to see some revenue from that in FY '26. And of course, over time, we do expect to broaden and support more of the storage array partners. And we will talk about those in future calls at some point.

[Operator]

Our next question will come from the line of Ben Bollin from Cleveland Research Company.

[Benjamin Bollin, analyst]

Rajiv, I wanted to start big picture. When you think about the discussions you're having with customers around these investments, -- how do you think their thoughts are evolving around traditional 3-tier versus HCI? Have you seen any notable changes, more willingness to migrate? Just any big picture thoughts. And then a follow-up would be back in '23 prior to the VMware acquisition, it did seem like there was a large number of customers pulling forward renewals. Curious if you're seeing any top of funnel opportunities from those customers as they approach 3-year milestones and what that might look like for visibility on a go-forward basis?

[Rajiv Ramaswami, executive]

Yes, both good questions, Ben. I think on the first one, we haven't really seen a big change in terms of the 3-tier storage [indiscernible] storage versus HCI. We fundamentally still believe that HCI is the best way to build a private cloud foundation and a hybrid cloud foundation for our customers. But there is still a huge installed base, right? If you look at the market overall, perhaps 20% of the addressable market is HCI today. and the rest are still sitting at 3 tier. And we will continue to grow into the 3-tier market and convert some of those customers over time, and we laid this out at our last Investor Day almost on a work-by-work cloud basis. Now that said, there's still a very large installed base of 3-tier storage out there. And it will -- it's going to be a long, long while before all of that stuff migrates or it may never migrate. And so that's really the reason why, from our perspective, it makes sense to go broader. And think of ourselves that are not just a provider anymore, but now a platform company. And as a platform, you support a broad ecosystem around you. So you can have -- we have Excel storage or you can have our own storage. And so we now let the customer decide. And we still say, look, if you want to go to HCI, you're going to get significant TCO benefits compared with 3D solution, but we'd like to use a CTS solution. Here the rest of our cloud platform stands the storage piece, and we'll still give you the best experience when it comes to hybrid cloud offering and a hypervisor option alternative for VMware. So that's the thinking when it comes to HCI and 3-tier storage for us. Now in terms of the VMware dynamic on renewals, Yes, we appoint a lot of customers did place 3 years, in fact, some did 2 years, some did 5 years with VMware as soon as they heard about the acquisition or around the time the acquisition was announced or as it started getting to be closed. And I would say that's, again, all of those customers that those renewals are coming up now, let's say, this year or next year, you can group them into -- but that's 2 buckets, right? The first bucket on the set of customers that did say, you know what, I am actively going to migrate out and put places take steps to do that and be out of there. And in fact, we've had several customers like that who did renew who had bought themselves some window of time and then embark on a migration with us. And in fact, we've talked about some of those on prior calls, we talked about a large North American insurance companies that's been doing this and has a plan to -- they're almost out of their dependence on VMware, right? And they've been doing the migration pretty actively. And we've seen that with some of the other customers who have been public about their stories there, too. Now at the same time, there was also a set of customers that did not move. And for that [indiscernible] customer, now they're looking at another renewal that they probably have to renew. And what we see is the sense we see is for those people who are not ready, they are increasingly saying, okay, boy, I think I hope this is my last renewal and I can do something about not being dependent again, say, 3 years [indiscernible] now. So we are seeing quite a bit of variety and variations across customers, depending on how they approach approaches, which is why we've always characterized this, Ben, as a multiyear opportunity, right? This is not going to be just one cohort after the other cohort, it's just going to be a gradual opportunity because there's customers at many different stages in their journeys.

[Operator]

Our next question will come from the line of Mehdi Hosseini from Susquehanna Financial Group.

[Mehdi Hosseini, analyst]

Yes. This is for the team. As you think about ARR, especially over the next year or 2, at what point should we assume there will be increased diversification of products, especially as we move from HCI to multi-cloud. And as part of that question, would would ARR growth be driven by new logos or would existing customers be the first adopters of additional products, especially as we migrate to AI inferencing? And I have a follow-up.

[Rajiv Ramaswami, executive]

Yes. I think it's a very broad question there, maybe. And I'll try to pass some pieces of it, and hopefully, you can help as well. So first of all, I mean, we do have a product portfolio today. It's a full product platform. But again, it can be -- you can consume it from a cloud infrastructure perspective, we have to management and add-ons that our customers can consume unified storage, which is also an add-on and then our database platform. And then now we have our modern app platform and our AI solution. So these are all -- so we already have a portfolio of products. Of course, the bulk of our business today is still coming from the core. And -- but we are seeing, for example, good attach with our cloud management solutions. And with some of the other elements of our portfolio that are still early. So for example, our hybrid cloud solutions are still early, modern applications is still fairly early. And over time, I think we do expect those portions of the portfolio to build up and be additive and be growth additive on top of our -- the rest of our core as well. Now in terms of the nature of the ARR itself, of course, we have new logos, and then we have expansion within our current customers. And the new logos you've seen what's happening there. We've been on a good clip when it comes to adding new customers. And most -- the vast majorities of the new logos and new customers start [indiscernible] with our core offering. And also now our hypervisor as part of that. Now when it comes to expansion, I think we certainly look at adding the rest of the portfolio as one of the expansion levers for us, along with more of the same workload that they were consuming or winning new workloads at the customers. So I would say we have 3 expansion vectors expanding with the rest of the portfolio, adding more of the same workload, expanding into new workloads. And those 3 also drive together expansion ARR.

[Rukmini Sivaraman, executive]

The other thing I'd add -- sorry, maybe if I can add one other aspect of your question was contribution, I think, of expansion versus new logos and ARR. And 1 way to think about it is that the NRR we give you every quarter, which is 110 in the most recent quarter. That is, of course, the notes our ability to retain and expand. So if you assume that our retention is something less than 100%, and our expansion is something greater than 10%, right, to kind of get to that 110%. And then we said ARR growth of 18%, the remaining 8% over and above the NRR, that was the contribution of new logos. So in general, when you look at land and expand performance in any given quarter, they expand typically is a significant majority of that land and expand with new logo being the smaller dollar contributor because of exactly what reset people tend to start small and then and continue to expand with us, that's typically what we see.

[Mehdi Hosseini, analyst]

Sure. And the reason I asked the question is I just wanted to make sure I understand the dynamics. And there wouldn't be a period where ARR growth would slow as we go through this transition. But correct me if I'm wrong from what I understand from you, these 3 vectors are going to provide these waterfalls, so that even if, let's say, market share gain come to an end, you have these 2 other vectors that kicks in and should help sustain the double-digit growth in ARR? Is that the way -- is it the right way of thinking about this simplistically?

[Rukmini Sivaraman, executive]

[indiscernible] commenting on specific ARR expectations, Mehdi, because we don't talk about that. As you know, we don't guide to it on a quarterly annual basis -- what I will say is that we do have -- we do view our business as having multiple levers of growth that Rajiv just outlined, whether it be portfolio, whether it be land and expand, landing new logos, expanding with them and so on. So yes, we are striving to have multiple growth drivers for the business overall.

[Mehdi Hosseini, analyst]

Got you. And one quick follow-up. You said the long-term tax rate of 20%. Right now, we're running less than 1%. Should I assume that this is a small trajectory with the increase in the tax rate.

[Rukmini Sivaraman, executive]

Let me clarify what I said, which is that if you look at our -- is it only about our non-GAAP effective tax rate, there is no change to cash taxes, which we still expect to be in the mid- to high single-digit percent of profit before tax. So I'm not sure we're getting the 1%, Mehdi. And what we are saying is if you look at fiscal year '24, for example, the way we were previously calculating -- the non-GAAP effective tax rate was factoring in all of our U.S. net operating loss NOL carryforwards and other tax carryforwards. And so that has resulted in an effective non-GAAP tax rate for fiscal year '24 for 6% as an example. What we're saying is we're going to -- starting in switch it to a 20% number, which we think is more effective of our longer-term non-GAAP effective tax rate, it also smooths out any variations from period to period.

[Mehdi Hosseini, analyst]

Got it. And the 1% was non-GAAP, but we take it offline.

[Operator]

And with that, this will conclude the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.