Nutanix, Inc. (NTNX) Earnings Call Transcript

Great. Thank you to the next, I guess, the audience here for joining this fireside. I'm happy to say that we have with us the management team from Nutanix, CFO, Rukmini Sivaraman; as well as the Head of IR, Rich Valera. Thank you to both of you guys for joining us. We really do appreciate your participation here. And just for the audience, we have 40 minutes set aside here for a fireside format. I have questions drafted on my side, but you should have Q&A box in front of yourselves. Please log in questions, and we'll make sure that we can get to them while we have the management team here.

With that out of the way, Rukmini, just easiest question you're going to get all day, but just for people who aren't maybe dusting off the store or getting reacquainted as a reminder, what does Nutanix do? What is the market the company is addressing today?

Mike, I appreciate you all hosting us today. So thank you. Great to be here, and thank you, everybody, for joining and for your interest. So Nutanix is an infrastructure software company. We are helping our customers deploy their infrastructure in an easy, streamlined, efficient, high-performance way so they can then focus on what they should be focused on, which is their applications and their business. So in terms of where we are in the stack. So if you think of any application or workload that any of your companies might be using. So think of it as anything as simple as this Zoom application that we are on. It could be more complex things, too, like a trading application, right? If you're a financial services institution, you can think of a lot of the medical applications that hospitals have. So all of these virtual desktops, AI is, of course, the most modern app, all of these need to run on infrastructure. And historically, the architecture has been you need storage, you need networking, and you need some kind of compute power. And so companies historically, and this is still -- a lot of this out there, but the old way of doing things was to have these 3 silos of storage compute and networking and then a hypervisor or a virtualization layer on top. What we pioneered -- what Nutanix pioneered, was something called hyperconverged infrastructure, which was to really converge all of those 3 and simplify them with our software. So our software effectively virtualizes all of that. You can buy a simple server, an x86 over, which has cost way less than any of those storage arrays or other gear, and our software will do a lot of the heavy lifting for you. So it simplified things for our customers. It also saved them a lot of money. Our TCO, total cost of ownership reduction is going to be upwards of 40%, 50%, depending on what your environment is like. So there's significant cost savings. And it's a really high-performing solution. So that's what we do, Mike, and that's where we started. We've since evolved our value proposition to be able to run what we call run anywhere, which is it can run on your data center on-premises. If it's a private cloud, and we provide a cloud-like experience on-prem. It also runs on the public cloud. So we have solutions with AWS and Azure and others around running our software on bare metal. And we also can run on the edge. So edge, meaning retail locations, navy ships, things like that, where they're sort of their on-site on edge and all the infrastructure needs to be there, right? It can't be sort of sitting somewhere else where there's a lot of latency. So we have now expanded our vision to do that. We can also run both VMS and containerized applications. So we've expanded our vision to become a much broader platform. And our ultimate goal is to be able to run any application that our customers want to run and manage their data anywhere regardless of where it sits.

Excellent. Excellent. And I know it's -- we're coming up on QP here at the end of the quarter, but just because the latest data points we had were a couple of months ago at this point, can you just tease out potentially quick highlights from the most recent call, let's go back to the October quarter as far as execution and the performance the company has been driving.

Yes. So we have talked about our overarching sort of approach, if you will, is around continuing to drive durable growth while also driving profitability. And so we have lived by that principle. Our last fiscal year was July 31, we finished with a Rule of 40 score of 43. And to your question, Mike, on the most recent quarter, an October quarter, it was a good quarter. We beat our high end of our own guidance across both revenue and op margin, which we guide to on a quarterly basis. And what we saw was that we had -- if you think of our business, we also -- we've now -- you can think of it as there's a renewals base, so customers that have purchased from us before and come to renew with us. There's land, which is landing new logos, and there's expansion with existing customers. And so renewal continues to do really well. People like our solution. Our Net Promoter Score is 90, and it has been for a long time. So renewals continue to do well. We saw good performance in land, which is landing new logos. We give you our new logo -- number of customers we have, so you can calculate a new logo, that saw a nice increase year-over-year in the October quarter. Where we did have results below our expectations was in the expand portion. And one thing we called out, as you'll remember, Mike, was that our federal business is seasonally strong in this October quarter because, of course, U.S. Fed has their year end in September. And that was weaker than we would have liked. We did have a strong compare to the year ago, October quarter, but which is a really great U.S. Fed quarter. This one not so much. So we did see a decline year-over-year in the U.S. Fed. And a good portion of that, we believe, is because of this continuing resolutions that we've had leading up to that September that delayed budgets and so on. So we talked a little bit about that to give people color on what we were seeing. We do expect in this quarter for U.S. Fed to get back to more normal levels for the January quarter, right? So just to be clear, it's not sort of a catch-up for the year or anything like that, but we do expect this to be a more normal January quarter relative to what we've seen in the past. And so those are the dynamics. We did maintain our full year numbers for the top line, Mike, where we were able to take up our free cash flow and an op margin guide for the full year. We maintained the top line despite a good beat on revenue. And that's simply because it's still early in the year. We're only 1 quarter in at this point. And we think there's enough moving pieces between things that are going well. The new administration is taking office, of course, here in a few days. And so enough moving pieces that we chose to keep that top line guide the same while growing our free cash flow -- while increasing our free cash flow and op margin guidance for the full year.

Great. And just coming to the demand for a second. What the environment is like out there? Obviously, we're rolling into new calendar year here, right? Even though you're just a quarter into your fiscal, I would just be curious, how have customer conversations trended? Is there any change in tone and even taking a broader look, now that we know that we'll have a Trump administration for the next 4 years, does that in any way -- is that coming up in conversation? Or does -- what is the change in administration has that historically impacted Nutanix's business?

So a few things there, Mike. I'll maybe talk about 2 or 3 different things. So one is, I think, overall interest level Nutanix remains good and high. There's people who are interested in our solution. We can talk more about market and competitive dynamics specific to us. So that continues to be the case. So that's good and no real change there, right, in terms of interest level, or overall tone, I would say, is broadly unchanged. Now when there are some -- to your point, some questions around, well, there's an administration change in the U.S., what does that mean? And I think the short answer is we don't know because there is, I think, a lot of -- there's been a lot put out there in terms of what the administration might prioritize. There's been a lot talk about what the Department of Government Efficiency might decide to do, but it's also unclear how it might actually play out in terms of what they would like to do versus what they may actually have the power to do, right? So there's, I think, still a fair number of unknowns, Mike, in terms of how that will all play out. And then look, inflation, interest rates we've all -- I think, probably read -- everyone on this call probably reads all the same sort of financial news. And so that has also continued to evolve, right, in terms of how many cuts and what that could look like? Is it higher for longer? So I think there are some moving pieces certainly from a macro perspective, whether that's sort of just interest rates in the U.S. and inflation and in terms of the new administration, Mike. We don't know anything too much more than I think what we're all reading and trying to glean from what's being said. So yes, we'll have to see how it plays out, and that was one of the reasons why we also chose to keep our full year guide where it was because there's, like I said, enough uncertainty. But overall, in terms of tone of conversations we're having with prospects and customers, those haven't changed in terms of interest level and so on. So I would say that was -- we didn't see sort of a big change in December to Jan or anything like that, right, largely kind of unchanged in terms of that interest.

Excellent. And for -- again, I want to make sure that we come to the tech and some of the evolution of the platform here. But I think one of the things that a lot of investors are focused on is obviously the competitive dynamic given some announcements that have taken place out there, the super high level with some of the industry M&A that's occurred, can you talk about how the shape or size of some of these customers or the pipeline of Nutanix has changed?

Yes. So we have said, Mike, that our pipeline mix has moved more towards larger deals, the mix of larger deals in our pipeline has grown, right? It's still a minority of the pipeline, right? I'd maybe think of like 1 million plus opportunities and things like that. But it's -- the mix of those deals has grown over time. And that's, I think, at least 2 things impacting that. One is we ourselves have chosen to go more upmarket, upmarket meaning towards larger customers because that's where a lot of the spend is. And so we've said we are -- the nice thing about our platform is that it's broadly applicable, right? So if you have IT needs and you're trying to -- and if you're large enough of an organization to have an IT department, you probably do need -- there's a need for Nutanix there or someone like Nutanix. And so that's the good thing. But we have to be mindful of where we put our resources, right? So we've deliberately chosen to direct our sellers more upmarket and have carved out a segment with some of the smaller, higher volume customers for the channel, for example, because they can help us bring in that. I mean that's early days, but they are starting to contribute in terms of that mix working. So that's one that's contributing to the growing mix of larger deals. The other factor, which is what you alluded to in terms of industry M&A is Broadcom's acquisition of VMware, which, to be clear, we've competed with VMware for many, many years. And so that in itself is not new. What is new in the market is Broadcom's acquisition and some of the changes they have made in terms of how VMware is going to market. And so what that's meant is that many customers -- sorry about that -- many VMware customers are considering alternatives more so than ever before. So they might have been happy with VMware. But now with some of the changes that Broadcom has made, they are saying, well, is this the long-term partner that I want? Are they innovating enough? They have effectively increased prices for customers, and we can talk more about that. So what does this mean for them, right? So that is open the door in some ways, has given us an opportunity to go after doors that were previously closed, but are now more open to us. So that is, we view, as a multiyear opportunity for us. It's not going to be a step function. We can talk more about why it will be multiyear, but we do think it's a multiyear tailwind for us in terms of accelerating that sort of TAM and our ability to go capture in that available market. So that is sort of what's happening, and it's reflecting in our pipeline, Mike. To your point on pipeline, as even the larger customers sort of think about, well, like what does it mean for me? Do I want to be committed to someone like Broadcom as my primary vendor, they are opening the door to us, which means that, again, we have more larger deals in the pipeline. So I would say that, that's a good thing. It's by design. But these deals are also more variable in terms of timing and size and structure and so on, right? So that's all something we talked about, which is that it does create more variability in terms of when they will actually convert into bookings. But overall, we're happy with that -- with those opportunities coming our way and intend to make the most of converting them.

Got it. And I apologize, I got a cracky radiator here in the New York City office today. So sorry if there's any background noise on my side. But just wanted to call out as far as that pipeline and the deals that are coming in, can you talk about what you guys are then seeing because that is a different dynamic, right? I'm sure that you guys are tracking how those deals move through the pipeline, what the conversion is over time for those deals. But how is it you guys are then implementing the rigor processes on your side to ensure those deals flow through? And then any comments as well? It would stand to reason that those sales cycles are longer in some capacity. But any flavor as far as how those sales cycles compared to what a traditional -- yes, I guess, a traditional sale for Nutanix would be?

Yes. So traditionally, we've said it's about 9 to 12 months from when kind of an opportunity gets created to when we actually get the booking, the purchase order from the customer. What is, as you point out, with these larger opportunities, they do tend to take longer, especially if it's a new logo, right? I mean, a customer we haven't transacted with before. So in addition to all the technical work as a proof of concept, there's all the technical validation, there are security checks. All of that needs to happen. In addition, there is also the vendor onboarding if you're a new vendor, right? There's -- procurement, of course, will have a big process, and then there'll be all approvals. So we give one example, Mike, of an 8-figure, $10 million plus ACV transaction that we booked in the April quarter of last year that was 2 years in the making. And that went with a Fortune 50 financial services company, and that went all the way to CEO for approval. So CEO of Fortune 50 company. I think that's a lot of approvals. And so yes, so we are seeing some of those take longer. And I think part of your question was how do you -- how do we try to move things along and do everything we can in our control to make sure that, that's happening. So we have done a few things that are now -- and this is -- it's -- I think it's intuitive, we do this, but we have these deal teams, deal pursuit teams we call them, that are cross-functional teams that has everybody from, of course, the sales team, but also, it will have finance, for example, because they might be things along the way that we might need to approve in terms of deal structure and things like that. It might likely have a product management person. So it has a cross-functional team that is -- that's goal -- whose goal is to keep this moving forward at pace. And so we are effectively being really responsive and pushing them -- pushing the customer where we can to make sure this is going as quickly as we can. The other piece, Mike, I would say, is we've always ask customers and try to understand internally why Nutanix and why now? Those 2 questions get asked when we think of pipeline. So that's always been the case. But the why now question, now has a few more subquestions, as you can imagine, right, especially if it sort of a VMware displacement, like, well, when is the VMware renewal due? Because that will give us a sense of timing, just how much time does this customer have and when do they exactly need an alternative. If it requires a hardware change, then we have trained our people to ask when is your hardware depreciated? Like when did you purchase your hardware last? Or like what is your depreciation cycle on that? Because that might affect when they're able to go and say, okay, now we can go retire that hardware and buy new hardware for the new architecture. Even though we don't sell hardware, right customers do run our software on servers. So that's another question. Another question might be what happens if they don't purchase it in a given quarter? Meaning, one answer might be we lose budget, right? And that tells you, okay, well, this will be motivated to do this now. And whereas if someone else says, well, this is a more strategic investment for us. So we have -- it could come in this quarter or it could come in. Nothing would happen if it slips, right, from their perspective. So then it gives us a way for us to moderate our own expectations, but also to get precise with the customers so that we can make them successful, right, and what they are trying to accomplish because they probably have a time line in their minds, too. And us trying to understand that, one, allows us to make sure we're giving them everything we need and are being responsive in moving this along, but also helps me as I think about when is the deal going to come in and when can we think about confidence level, right, and predictability of the business overall.

And I know you, I guess, we're partially already addressing this. But one of the things that we're trying to think through on our side is as these deals are larger -- some of these deals in the pipeline are increasing in size and scope just based on competition or how your platform has evolved in strategic decision to move upmarket, the persona. And so have you seen a meaningful shift then as far as type of the buying center that you're engaging with or the amount of red tape you need to go through to get that deal closed? I know you had cited that 8-figure contract with the CEO as an example. But is that still maybe not the norm? Like I'm trying to see how far up the ladder this needs to go?

Right. And so I think it depends is the answer, Mike. So yes, we don't do 8-figure as a matter of -- we don't do it every day, let's say. And so that was -- it was a great one, of course, and it's a great testament, I think, to the platform and to, I think, the value the customer sees in us. But we don't do those all the time. And I think in terms of who we are selling to, Mike, one of the things we've tried to do is make sure we have relationships even at the more senior levels, right? So previously, I said it was the VP of Infrastructure. How do we also make sure we're talking to the CIO, right, or to the CFO or whoever else might be involved in that decision. So that's been an evolution for the company as well. So we have now our customer advisory board, things like that, that are making sure that we have the more senior folks also involved, so that -- to the point that I think I made earlier that you referenced where to the extent ultimately, the PO does need to get approved by, and it depends on the company and the size of the order, of course, that everyone is aware of the value that we can bring and that they have had a chance to be brought on board with why Nutanix is being purchased. And so when they get that PO, hopefully, there's not a lot of questions at that point, right, in terms of why are we investing with this vendor. So yes, that's an effort we've made deliberately to try and make sure we are getting to as many of the decision makers as we can, including the CIO. If these larger companies, it may be the CEO, for example, right? Our CEO, Rajiv, will reach out and make sure that he is connected to the people there. So they also feel -- the customer also ultimately feel that they have all the connections with the Nutanix that they can call, if they have a question or if they ever needed help, right? So there's that sort of making sure we have all the right connections and at the right levels at these customers.

Makes perfect sense. You would also alluded to pricing earlier, and I didn't want to leave that hanging right? So can you talk about what your competition has done from a pricing perspective, how Nutanix has responded? I'm just curious to flesh that out as well.

Yes. So our primary competitor or the most direct competitor has been VMware for a while. And of course, we're displacing the legacy sort of 3-tier architecture, you could argue. Those are also the folks that we are saying, look, that's we can do better, right? And so you could argue there as well. But from a direct portfolio perspective and our offering, it has been VMware. And so them being acquired by Broadcom, they made a few changes. So you could buy before a perpetual license from VMware for their vSphere, which is their hypervisor offering. So we believe by the majority of VMware customers were purchasing the stand-alone hypervisor that VMware pioneered. And so -- and that they were selling perpetual licenses before. So if you were a customer, you could have just been paying annual support on that perpetual license. And so in terms of what has happened in the market, what Broadcom since acquisition has said that, well, look, by and large, you cannot buy a perpetual license anymore. You have to switch to a subscription-based license. And so that effectively appears like a price increase to customers. And then secondly, by and large, again, there's been some, I think, nuances around this, but they've also, look, you have to purchase VCF or VMware Cloud Foundation, which is their full stack and frankly, the most comparable, right? So VCF has -- yes, it has their hypervisor, but also has like their HCI offering, which is very comparable to our full stack. And so those have been effective price increases. Now we have historically not sold our hypervisor stand-alone. We've had a successful hypervisor, right, like 70% of our customers use our own hypervisor, but we haven't sold it stand-alone for a bunch of reasons, including, there wouldn't have been a big need for it historically. So if we just stick with that for a moment, their VMware Cloud Foundation stack is what effectively we have gone to the market with for a long time, which is encouraging customers to adopt the new, more modern architecture of HCI. And so compared to that, we've been pretty competitive even historically, Mike, and are still competitive in that. So we have been viewed as a premium product actually in the market. And so that continues to be the case. And look, we want our customers to think of us as a long-term partner for them, right? So when we would -- yes, of course, price is important, and we want to make sure that customers know that we intend to be a long-term partner for them. We're willing, for example, to give customers more visibility into what their price might be at renewal. We sort of charge inflation-like price increases at renewal. If you shorten your duration, then we might adjust that because obviously longer duration, more commitment gets a better annual price. But that's been our philosophy. And so giving -- from a pricing perspective, we try to actually start with the customer more on, here's why we are a better partner for you. And that includes things like why is our product superior. We have a data-focused mindset. It's a much more simplified architecture. We offer a lot of flexibility of choice in terms of platform. Our customer NPS is 90. And so we are a much better long-term partner for you customer, and we are priced to reflect that. So that's how we've approached this. There are a lot of changes day-to-day in the market. It's quite dynamic, Mike, and so we'll continue to watch that. But our intent at this point is also be flexible when it's a new logo and customers sort of want to make this work for them, we want to work with them, right, to make it a successful deployment, not just today, but years in the future because the other thing that Broadcom has said is, they have also set very aggressive EBITDA targets, which has meant that they have had to reduce some investments, right, both on the R&D side and on the go-to-market side. So when you think about innovation, we are embedding in containerized offerings. We are investing in Gen AI, and we intend to continue to do that because we are an innovative company and intend to stay that way. So we would argue that we are the much better longer-term partner for our customers and prospects than anybody else in the market.

Great. Great. And on the technology front as well, one of the bigger items that we receive questions on and how nascent it is with GPT-in-a-Box. And I know that you guys have the 2.0. Just as a refresher for the audience, can you talk about what are the capabilities that this offering is bringing to the market today?