Nutanix, Inc. (NTNX) Earnings Call Transcript & Summary

Okay. Great. Well, good morning. Thanks for joining us today. I'm Jack Andrews. I follow the data analytics and infrastructure software space here at Needham. We're very pleased to have Duston Williams, the CFO of Nutanix; and Monica Kumar, SVP of Product Marketing Solutions. So maybe just to level set everyone in the room, could you just provide what is a typical catalyst for somebody to become a customer of Nutanix. I mean infrastructure is being complex, it's been complex for a while. Is there a specific use case that really tips people towards Nutanix, or is it more of the analogy of a frog boiling in water over time and all of a sudden, the pain grabs and becomes too great.

Wow, frog boiling in water. I don't want to think of that image. But IT infrastructure modernization, data center modernization has been a theme for IT for about a decade or more. If you think about it, and it's all been driven by simplifying, managing different compute, networks, storage, virtualization resources and making it easy. And so that IT can be more productive. That's how Nutanix was born, right? So about 10 years ago, we came into the market with a dead simple way of putting together infrastructure to run applications in data centers. So obviously, that was all driven by simplifying IT's life and making them more productive. So rather than taking months and weeks to deploy infrastructure for app, you can do it in 2 hours and really start managing very simply. It was all based on kind of like the philosophy of how the hyperscalers like Google at that point and Facebook were building internal data centers. So we took the same kind of model of building clusters that IT can deploy. Now fast-forward 10 years later, it's not just about the pain of being more productive or pain of simplifying my life, if I'm IT. It's about delighting my customers. IT is under a lot of pressure to deliver services to their end customers, which is developers, analysts, executives, their customers very quickly. So I would say it's not just the pain. It's about -- you're going to actually be disrupted if you're not flexible and agile and innovative in the solutions you're delivering. So fast-forward 10 years later, and I think IT is looking for not just simple -- simplified infrastructure but infrastructure that can be deployed in a hybrid-start environment that can be deployed in multi-cloud, so they can instantly scale infinitely their resources on demand and just serving new customers and new needs. So I would say, it's about innovation and simplicity, both driving IT's adoption of infrastructure technologies and specifically software like Nutanix is.

Great. Appreciate the background. So just as you -- as we sit here today, could you just talk about the state of the market. I mean once upon a time, I think it was more of an evangelical sale in terms of just this whole concept. Now today, you've got other large vendors in space that have some sort of hyperconverged products in the marketplace. What's kind of the state of the market today just from an overall adoption perspective, and how mainstream is this today?

Absolutely. Hyperconverged infrastructure market has become pretty mainstream now. If you look at any, sort of, analysis from like analyst like Gartner, they're predicting in about 3 years, 70% of IT organizations would be deploying HCI as the underlying foundation of the infrastructure. But I think the market is actually evolving beyond just infrastructure. We are looking at hyperconverging clouds. And what do I mean by that? I mean what is hyperconvergence anyway, right? It's this notion of bringing together and integrating all these different components in a meaningful way. So it becomes dead simple to deploy and manage and keep updated. So if you apply the same notion of HCI now that was 10 years ago to cloud, we are seeing the market evolve there. Which means, we are making hybrid cloud a reality. So hyperconverging is customers want to use an on-premise cloud, which is what they do in the data center, but then also be able to use a public cloud. Be able to use different types of clouds, maybe Amazon, maybe Azure, maybe Google, on-prem. So Nutanix is now evolving the market with what we are bringing to the industry is hyperconverging clouds and giving ability to customers to take the same infrastructure software that they have in 1 cloud to the next cloud, to the next cloud. So it's the same service level you expect. Performance, availability, security, reliability and also the same management experience and the same skill sets that we can deploy across multiple clouds, including on-prem cloud.

Great. So just to put a fine point on it. We've gotten some questions. There's been some articles in the trade press recently about HCI market share, who's winning, who's losing. I think it may depend on some sort of definitional aspects of things. So what's kind of your view of where you stand in the market and how to think about it that best suits the value that Nutanix is really bringing to the HCI world?

The way we think about HCI, it's a software, right? So if you want to compare real apples-to-apples, you need to compare software-to-software revenues by each vendor. And to us, that's going to be the real market size, if you want to really go there. Now what's happening is, in the last few years, there's been a lot of mixing of hardware and software, different analyst organizations are reporting on the HCI market. We are actually working with IDC to come up with the real way of looking at HCI market, which is software only. So I'm hoping that, that's what we start seeing in the near future, so that we can start separating out the hardware. The underlying server platform from the actual software. Because ultimately, HCI should be portable across multiple platforms. On-prem hardware but also cloud. I mean what's to stop somebody from taking HCI environment to AWS. In fact, we're going to make it possible, right, that's what we're working on right now. So that's why it's really important that we -- when we think of HCI, we think of software-only market and look at the size of it appropriately. Duston, you want to add?

No. It's good.

So well, anyway, so shifting gears a little bit, Duston is sitting here today in New York. How's business?

I can tell you how business was at the end of last quarter, if you want to talk about that. But...

I'll just try.

I'm not favoring this side of the room. It's just this chair.

No, I just want to follow up...

These are some unique chairs we have here today. Here it goes again. I'm going to hold on here. So yes, obviously, we've been through quite a bit with subscription transition over the last year. The exciting thing, and it was a little messy like any subscription transition, and we've still got some things to work through, of course. But I think the thing from my perspective is that the hard work isn't totally behind us. But a lot of the hard work is behind us with the subscription transition. And we have yet to, and it will be a while, to really reap the benefits of that transition. And that real question is what to do with the business model ultimately over time? And why should we be any different than any other subscription model and the leverage that you get from renewals and things like that. So I think, again, you asked how business was, I'll talk about last quarter. But again, the last 2 quarters have -- certainly were better than when we first started the transition, and we continue to plow through that transition as fast as we can, by the way. We've got a goal of 75% subscription term-based business by the end of our fiscal Q4, 73% last quarter. But again, the real interesting thing, what I get excited about is, again, the business model. And if you want to fast-forward to FY '23, FY '24, FY '25. When these renewals start to flow in, the question is how efficient are those renewals within our business model? And today, the renewal activity as a percent of the total business is very small. But that sliver turns into a pretty big piece of the business over the next several years. And then how does the sales and marketing cost structure look like because you got 2 now distinct pieces of the business. You've got a renewals piece that should come at a pretty efficient piece of the business, and then you've got upsell and new business and that's a different piece. So that's what we've been pretty excited about, and that's what we're working towards here. And we'll see how the renewals flow; today, we believe we've got roughly a 97% customer retention rate. So the model is set up nicely for some longer-term leverage. And shorter term, we're working on a lot of things that also help leverage in the short term.

Sure. Well, just a follow-up to that. On the -- over the past couple of quarters, it seems like from your earnings calls that ACV growth is accelerating. I know you've made some changes on the sales side of things. Could you just talk -- drill down a little bit more about what changes you've made? And what do you think is sort of causing this reacceleration?

Well, I mean there's no secret, we're spending a fair amount of money. So the acceleration has to come sooner or later, right? There's no free lunch here. And some of that money has gone to demand gen and pipeline generation, which has improved over the last couple of quarters. A lot of it's gone to sales infrastructure, whether that's quota-carrying reps or support crew for those quota-carrying reps. And then, clearly, within the sales ranks, we've made some changes in the Americas a few quarters back and that team now is starting to execute a bit better, obviously, with a stronger pipeline. Chris has come in with a little more, I think, just a disciplined kind of business, general manager type mentality in that business. And clearly, starting to help. Still early, still got some work to do. And then we're starting to put a fair amount of resources in commercial. That hasn't really played into any, really, growth acceleration yet that, but we're hopeful on the commercial investments that we're doing in the Americas that, that will clearly help things. And then the new products are starting to kick in. We've talked a lot about new products. We're spending a lot of money on the new products. And we've mentioned in FY '19, which ended in July, there were roughly 10% of the new ACV generated in FY '19. So I think you got a lot of different things going on there. Still got a lot of hard work in front of us with a lot of this stuff, but it's pretty exciting when you look at it in its entirety.

Sure. And just to follow up on that. I mean one of the interesting points I thought out of your most recent earnings call, you talked about backlog being flat sequentially when it's typically, there's a seasonal down period of time. Is that sort of the lead gen spending getting on track or anything unusual from that side of things that could be causing some encouraging trends just on the backlog side?

Yes, clearly, a bigger pipeline helped in that quarter. And big deals. I mean big deals secure a lot, and we had a pretty good big-deal quarter in Q1. And I think trouble with big deals, they're never totally predictable and things like that. But I think over an extended period of time, the subscription tool, as I call it, has the ability to go drive bigger deals over time also because we now have this subscription tool that we have all this life of device infrastructure that we have sold over the last 5, 7 years or so. Most of it hasn't refreshed. Now with the subscription tool, we can go into those life of device, big, big customers and offer a lot of optionality, if you will, with subscription. We can co-turn a lot of their environment. We can upsell it. They don't have to buy hardware. We can do this and do that. And we're at the early stages of that, there hasn't been a lot of that, but where we have done that it's worked quite effectively for the company, I think, even more importantly, quite effectively for the customer. So I think over an extended period of time, when those deals hit and it's hard to tell but I just think that tool will be a natural driver to bigger deals.

Sure. I want to broaden that out a little bit. Because as you alluded to, you've introduced a number of, call it, SaaS related products over the last year or so. Where are we in terms of just not only your sales force getting up to speed, but also just customer awareness. And broadly speaking, and then which particular one of those offerings do you think is really moving the needle that we should be paying attention to?

Absolutely, yes. So the way we look at this is not product by product but really solutions that customers want from vendors like us. So there are 3 categories of solutions that Nutanix offers building on our core HCI platform. This core infrastructure modernization software, which is HCI. On top of that, we've built products in 3 categories, roughly, storage. So we now offer a product that is filed which is in a file storage, so lots of unstructured data is being generated in the world out there. People want a platform that can manage not just structured data but also unstructured. So files, actually, we are seeing a decent uptake of that product adjacent to our core platform. This is an object storage that we just recently launched in the market. So storage is one area. Another area is security. So things like network micro segmentation attached to our platform. We are also seeing customers specifically I've got a HPE customer very interested in our flow product, which is the network micro segmentation product. The third area is data protection. So things like DR, backup, backing up your platform, data and application. So those are the 3 major categories around the core that kind of form infrastructure modernization products at the core. The second big category is automation. That's where we announced newer products like Prism Pro, Comm, Era. So if you think about all those products, I just named the names. But basically, the way we go to market is not by name but by capability. So with the automation, we're helping IT operations be more automated, they can predict using machine learning and AI in terms of capacity planning. In terms of things that may go down before it goes wrong and correct the faults and make sure that they can support the system and without any downtime. Things like application life cycle deployment. So creating images of various applications and creating a marketplace inside the organization or moving apps from private cloud to a public cloud, that can be done through Comm, for example, which is an application life cycle product . And then Era is a great example. A lot of our customers run databases on Nutanix today. Well, how about making it real easy for DBAs to provision those databases because DBAs are under pressure from developers. They want access to the databases right away. Rather than take a week or 2 to do it, now within a few minutes, you can give a database to a developer by using tools like Era. Provision is updated, patch it across heterogeneous databases. So not just Oracle, but MySQL, Sequel server, we're adding MongoDB to the list. So those are the types of things we did with automation. Making, again, IT's lives easier to automating how they deploy and manage the applications on top of the Nutanix core platform. And then the last set of products is cloud, which is where we -- we have products like Xi Leap, which is a DR as a service, we have frame which is desktop as a service. We have Beam, which is a really interesting tool where you can do cost and security governance compliance across -- moving across multiple clouds. Where is it going to be the most cost-efficient to run a particular workload? On-prem, in Amazon, in Azure, in Google, wherever, Beam can help you assess that. And then you can deploy your workload there. So those are the 3 categories. We are seeing, like I said, uptake with Sizer is a great example and Flow on the core side, on top of HCI. Era, I think is a great example on the automation side and Prism Pro for the AI ops. And then, of course, with cloud, we are very excited with the work we do with Clusters, which is right now in beta, and we hope for that to be generally available this year, and we have high potent expectations from that product as well.

Sure. So just to follow-up on that. I mean maybe a question, there's an aspect for both of you. One thing about all those capabilities you described in those solutions, but it feels like to me a lot of them are competing with start-up called point solution vendors in the marketplace. So maybe for you, Monica, how does Nutanix think about do you effectively have an umbrella of startup type of capabilities underneath Nutanix? Or how do you manage that just from a cultural perspective? And then maybe the follow-up for Duston, how do you think about allocating R&D resources to, again, this broader power of solutions, I guess, we'll call it.

Our strategy is to make the core platform stickier. So all of these products that I described, for a moment, think of them not as products but capabilities that are part of the core platform that make it more valuable to our customers as they're running databases on our platform as they run desktop, as they run analytics, as they run SAP applications, Oracle apps, as they build cloud-native apps, as they build the entire infrastructure for -- of cloud insights what people call private cloud. That's what Nutanix is and what we are aiming to continue to become for customers by adding capabilities. So that's how we develop product. It's not a point product competing with a particular start-up.

And a lot of these products, we have general manager-type folks running these products and in some cases, founders that came with the acquisition of some of these products, and they feel responsibility for the total P&L of these products. There's obviously booking targets, there's gross margin targets. They deal with the R&D folks on the product road map. So it's run like an effectively a mini business with profitability targets and cash flow targets and things like that, and then we kind of look at that. And from a total engineering perspective and what makes sense to allocate where based on that view.

Okay, great. So shifting gears a little bit. I wanted to touch on what's happening on the channel front. I think you've made some changes on your channel strategy. If you could, sort of, talk about those? And maybe specifically, what's happening with HP, which is a newer relationship you've been talking about.

Sure. I'll talk about HP. You want to talk about channel a bit? On HP, yes, we're excited about the HP piece of the equation now. Last quarter, we were into it about a quarter, about half a quarter and there was some initial good traction there. We'll, obviously, report out at the end of this quarter too on that relationship. I think it's a relationship that makes sense, I think, for both parties. And we've had some cases of existing customers converting over to HP products that already have an HP environment within their shop, so that makes total sense. And I think probably the more exciting piece of that equation is what's the amount of new customers that's being driven by that relationship, and we had a pretty good early start with half a quarter worth of results. Because in my mind, I think new customers with HP as a potential leverage and how that's helping us leverage from a go-to-market perspective. So yes, very excited there. We've focused our sales force on that product a little bit from a comp perspective. So there's a lot of internal focus there, a lot of excitement, a lot of initial traction. But again, we only had half a quarter. So we'll see how this quarter plays out, and then we'll report again. And I think, again, one of the better metrics is new customer traction on that relationship.

Yes, I'll just add on the channel partnership in general, which should not be a surprise to anybody. But that's definitely a big vehicle for us to expand our reach to the commercial segment, the mid-sized organization, and we have a pretty big focus on channels. Of course, in Asia Pacific and EMEA for sure, but even in North America, as we're building out a commercial business is to have a bigger outreach to those customers through our channel partners.

Great. And then, sort of, continuing on that theme, if we could spend a moment talking about some of the -- the competitive landscape seems to be continually evolving. There's a -- Amazon has their outpost product, which I think is now generally available. What is your view on that product? Do you think that is competitive to what Nutanix is doing? Or how should we think about that?

I mean I think, in general, doesn't it actually validate that the on-prem data centers are not going to die anytime soon. I mean I think to me, that's the big thing is, I think, ultimately, Amazon and other public cloud vendors are realizing that the on-prem world is there to live on for a long time to come, at least in our lifetime. I'm not sure when that's going to actually eventually die or not. So I think the -- what it's validating is that there is going to be a hybrid world going forward and a multi-cloud world. I mean even today, forget public cloud, even before then, in data centers, it's always been a heterogeneous world, especially for enterprises. I mean multiple databases, multiple hardware, multiple virtualization technologies in many cases. And I think we're seeing the same on with public cloud now. It's just an extension of that. It's choosing the right environment for the right workload. The right cloud for the right application, right? So yes, Amazon outsource does validate the fact that it's going to be a hybrid world, and I think that's good news for the market in general. We've been saying that for a while. The thing that's important for Nutanix, that I think a benefit to us is, this comes from the on-prem world. So we understand what it takes to run data centers. What it takes to run enterprise app, what are the capabilities customers need to running like an Oracle database for example. SAP application, some of the real enterprise applications because now as we take those customers to a public cloud with us, we can take them with the same exact operating system and the software that that they're used to, whether they can run it in Amazon or Azure, that's their choice. But we are providing them the core platform capabilities, so they get all the right SLAs for their enterprise applications. So I think it's a win-win. It's a win for us, we believe, when we have vendors like Amazon coming on-prem, saying, hey, this is a big market.

Sure. Well, I appreciate that. And then to follow up on that, another company that has similar capabilities would be Microsoft. And so I was just curious how you view, is Microsoft a friend, potential foe, frenemy, what's -- how do you think about that?

I think it's all about the ecosystem, right? It's -- coopetition is the name of the game baby, like I said. I -- that's the world we've lived in for many, many years, I mean that's the world we were born in as a company. If you look around, one of the big core value of Nutanix is the freedom to choose for customers, which means we support naturally in a number of technologies. Some of them may compete with us in some areas, but partner with us in another area. I mean amazon, by no means do I want to say is a competitor, we actually partner with Amazon very closely, that we're going to bring something big to the market with them. Same with Microsoft, we view them as part of the ecosystem. They're very, very important for our customers and for us. And you can name others too. I would put most of the vendors out there in our ecosystem coopetition category.

Right. Okay. So Duston, given the nascent but positive growth trends, how should we think about a potential return to free cash flow generation?

Yes. So we'll give, I think, a clearer view of that coming up with our Investor Day, March 26, coming up here in a couple of months. So we're looking forward to that. And I think we'll give a clearer picture of that. We had an unusual year, I think, for FY '20 with the subscription transition. And you'll see some improvements in cash flow over here over the next year or so, and then we'll get back to the underlying philosophy up until this point anyway. The underlying philosophy of business was pretty much grow as fast as you can, but be self-funding. And I think we've done a pretty good job of that over the last many years from a free cash flow perspective. We haven't used much free cash flow over an extended period of time. So that has been the philosophy. And then how do you even get more leverage. So I think top line growth lever is kind of what I'm focusing on these days. And you have short-term leverage things that we can do with things as simple as just discounting and there's tons of opportunity there. And then, again, the more intriguing thing, I think, over a longer period of time, how does subscription play into leverage over time. So we'll give a pretty clear picture. It's going to clearly be better than what we're going to do this quarter -- this year. And again, this year, it's just -- it's a bit unusual with the transition and we had some term compression, so you had some TCV compression, but that's why we focused on ACV, the annual contract value a little bit there. But I think we'll make some pretty good progress there, and we're focused on it.

Great. Well, we look forward to that, but just maybe just to put a fine point on it, if we can. You've talked in the past about rule of 40, is that sort of a rough framework we should think about over a longer period of time?

Yes, I think it has to be, ultimately, now whether that's ACV-based or whatever, if terms don't change, ACV, TCV, doesn't matter. But in a period of changing terms, ACV clearly matters. But yes, I think over an extended period of time, yes, it -- you have to get back to that level of philosophy, and how do we ultimately take a pretty big-sized company already and continue to grow it, add subscription onto it and get a leverageable business that generates a reasonable amount of cash flow and, ultimately, profitable. I mean that's what we have to go do.

Sure. And then could you just touch on maybe your M&A strategy moving forward. In the past, you've made some interesting technology tuck-in acquisitions, which would become part of your broader solutions portfolio, should we expect similar type of philosophy moving forward?

Yes. I think if there's something out there that we could tuck in. We've taken teams in, we've taken talent, we've taken some product. But yes, at this point, you shouldn't see any real change to that philosophy from a size perspective, I think I'd be surprised if we did that. We have enough to go worry about internally here to focus on. And so I don't think there'll be any major change to that philosophy.

Okay. We've got about 30 seconds left. So maybe just a last question for Monica. What's on the top of your priority list, what's the most important thing that you're working on over the next year?

Everything we do is with customer success in mind. I would say I'm really confident about our future because Nutanix is in a very unique position, if I think about it. We are the only server-agnostic, hypervisor-agnostic and cloud-agnostic, hybrid and multi-cloud player out there. And it's ours true message and really create that leadership position for us. And to me that's top of mind, next year is all about execution and getting us to be recognized as that.

Great. Thank you very much for joining us this time.

Thank you.