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

Great. Good morning, and good afternoon, everyone. This is Jared Weisfeld U.S. Technology Sector Specialist here at Jefferies. It's my pleasure to be joined here by the team at Nutanix, including CFO, Duston Williams; and Greg Smith, VP of Product Marketing. Before we begin the fireside, Duston and Greg will give a brief presentation. I'll then hop on and moderate a fireside chat. To the extent that you have any questions, please submit them via Zoom, and they will be directly e-mailed to me. So with that, Duston and Greg, I'll hand it over to you.

Great. Thank you, Jared. Just a few slides by way of introduction of Nutanix. So Nutanix is an enterprise cloud software company. We're best known for pioneering a brand-new market segment within the enterprise space that's now called hyperconverged infrastructure or HCI, that's how we're best known. What we'll talk about through the short -- the course of the short presentation, and hopefully in the Q&A, is we've dramatically expanded our opportunity by increasing the product portfolio and our capabilities of what we can bring to our enterprise customers. What you see here are just some top-level metrics about the business. Duston, of course, will spend more time on this. You can see that we've grown the business pretty substantially in excess of $1.25 billion. Much of that now is driven by software subscription revenue. What we're most proud of on the product side is what you see on the bottom, and that is the delight that we have brought to customers. So that's represented by a Net Promoter Score of 90, and that is on a 6-year average. So what that tells us is that customers that adopt Nutanix software to modernize to drive their data center and cloud operations are very delighted. And that is no surprise that also drives a very high customer retention rate, and we continue to build our installed base. So we're now over 16,000 customers worldwide with a lot of brand names that we'll look at in a bit. So next slide. In terms of the macro trends that are driving our business, the top level is -- it's really the importance and the criticality of investing in IT. More than ever, IT is the engine of innovation. The businesses rely upon to deliver new services and to grow their business, and then also maintain that business over time. And we see a lot of that happening today with COVID-19, of course, where the way to reach customers, the way to maintain relationships is digitally, and so that infrastructure becomes ever more important. So next slide. So the challenges that our customers tell us that they're facing, this is a CIO level, is they continue to struggle with past investments in their IT infrastructure. And that, too often, that when they try to build new environments to run new applications, they are dependent upon silos of infrastructure. Silos of storage, silos of compute, silos of networking, all managed by specialist teams, which slows down the process of both building or provisioning new IT environments as well as managing it. It's simply too complex. It's too cumbersome. That results in the inability to serve the business. And by serve the business, that means, "Can I get applications to market quickly?" And then I end up spending too much time in the care and feeding, the sustaining of that environment and leaving little time for innovation. So customers are really struggling, not always at an application level but on the infrastructure, to run their applications, which is why many companies are looking at cloud services that can get them to market much more quickly. To the next slide. So the opportunity that presents itself to Nutanix is vast, and this is something that's been consistent for us throughout our history that Nutanix has at least a hyperconverged infrastructure company and now expanding to be -- to have our software run in a hybrid cloud operating model. We are looking at a -- you can see a very substantial TAM. Essentially, every dollar that's spent today or pound or euro, rather, on storage, on compute, much on networking and virtualization is all within reach for Nutanix. So we feel that even at the current run rate of the business, we've just scratched the surface in terms of the opportunity, the opportunity in a lot of the enterprises that we serve today. So next slide. So what is driving that opportunity and what is driving the spend for Nutanix software? We see in 3 areas, one is infrastructure modernization. And that's simply that the way data centers have been constructed over the past 10 to 15 years no longer serves the business well, and that they are too complex, expensive, and they lack agility. So our customers are adopting Nutanix software. Running that software on off-the-shelf bare-metal servers and replacing a plethora of specialized proprietary hardware and software. And by modernizing with hyperconverged software and our full cloud stack, they are able to provision new environments much more quickly, they reduce the manpower required to maintain that environment and free up valuable IT staff to focus on more value-added services to better serve the business. We also see organizations really transforming themselves, where they want IT to be a service, a service to the business. Much of that is predicated on automating the IT infrastructure and providing a lot of self-service capabilities. So for example, "Can I provide, say, an application marketplace to my internal customers, to my business units?" So that every time an internal user needs a database engine, for instance, provisioned, that they can request on their own, and I can avoid all of the complex steps that's typically required by IT to make that available to the developer. And then lastly, "Can I provide the same experience that my users expect today? Can I provide the same experience that they get from a public cloud infrastructure?" And what we see is a lot of data center professionals. The expectations on what they have to deliver to the business have changed radically that they are compared to AWS, to Azure and to Google. So people expect a cloud-like experience. And so we're actually evolving our business to not only provide that in the data center but provide that same consistent experience across not only the private cloud but to any public cloud they choose as well, and we'll talk about that in a bit. And the next slide. So this is a quick snapshot of our product portfolio. If I just work in the middle, this is a multi-cloud platform. So this is a software stack that runs across multiple clouds. And by multiple clouds, you can see on the bottom left, the software runs in the private cloud data center. That's our traditional stronghold of our business. Increasingly, we're bringing that same experience into other environments as well, into other public clouds, and we'll talk about how we're doing that. Now what that stack consists of, it really begins with a foundational layer, and that's in the middle, that's hyperconverged infrastructure. That is our flagship product that provides an integrated or converged software that combines virtualization, security, compute, all of the IT resources to run any application. And of course, it runs both virtualized applications as well as container based. We have a number of additional software products that extend the functionality of our hyperconverged infrastructure solution, and they serve 3 fundamental areas. We can extend to provide higher level cloud-like services for the data center. We also have introduced a number of products that help the developer community, both developers, and let's call, DevOps. So this is in the area of application marketplaces. The ability to run more modern applications, like containers, providing new services, like database-as-a-service. And then also providing end-user services. So this is largely known as VDI, and this has been a particularly strong part of the business of late. These are software technologies that allow our customers to work at home. And so we have 2 ways that we provide end-user computing services. One is we provide the infrastructure to run VDI, whether it be Citrix, VMware or other. We also provide a desktop-as-a-service offering. So if customers choose to deliver desktops and applications via cloud, we can meet that need as well. So it's a hyperconverged software foundation, but we've extended it pretty dramatically over the past 3 to 4 years with additional services to help a variety of IT professionals in the organization. And then at the very top, you can see we've also enhanced the platform over time that we can handle a broad range of use case and workloads. So today, when we approach enterprise customers, there -- we can effectively address 99-plus percent of their application needs. There's rarely an application or use case that we can't help them with. So the next slide. One of the strongest value propositions for Nutanix that's allowed us sort of to win in spite of lacking initial incumbency is the ability to bring our customers choice to protect their ability to choose the right technologies for their environments, and this is not common in the enterprise space. Too often, there's a temptation to lock in customers, to limit their choice. Now it's okay to have your software be sticky, to provide value such that customers are reluctant to move away from it. But what we see too many of our competitors is they instead deliberately remove choice, and optionality on the part of the customers. So we have designed our software. We've designed the whole cloud stack and our business model for that point to preserve customer choice. And when we mean choice, we mean the ability for customers to run our software across a wide range of hardware platforms, both servers and purpose-built appliances. We're one of the few vendors in our segment that supports multiple virtualization technologies, multiple hypervisors. And today, and increasingly going forward, as our customers use our software not only to power their private cloud but take advantage of multiple public cloud services, we want to enable that, too. So we want to be a multi-cloud vendor, and we're going to make sure our solutions, our technology work across multiple clouds. And so not locking them in from a -- into any one cloud infrastructure. So the freedom to choose is really important in our product strategy as well as how we go to market. And the next slide, thank you. So why we win? The best way -- this is a slide that we've used with customers for -- nearly our entire existence. And this sort of summarizes why people adopt Nutanix, why they adopt our software to power their data center. We are a very simple solution that allows our customers to build infrastructure very quickly. In a traditional data center, it would take typically weeks or months to design, procure, build, integrate and test infrastructure. Instead, we can do it in a matter of hours, have a whole new environment built--if we can go back? Thank you--in just hours. So the time to market has been very, very critical, providing agility that our customers so demand. That simplicity is probably the one thing you hear most about Nutanix as to why customers like our technology. It's just simple. It's simple to deploy, but it's simple to manage. For the first time, they can manage data centers without needing teams of specialists. So Nutanix is so simple, we talked about consumer-grade simplicity that we really empower IT generalists. So that's something that we've taken great pride in. We spent -- made major investments to maintain both the elegance, simplicity and intuitiveness of the product. And if I can go back? Thank you. The flexible IT consumption we worked with the licensing model over time to make sure that it's affordable. And what we mean by flexible IT consumption is unlike traditional infrastructure, our customers don't have to overprovision, meaning, they only buy what they need today, and they can expand incrementally to add capacity over time. And this is in contrast to the way data centers have been built, where -- to buy storage or by networking 3, 4 years in advance. And so I have a lot of unused underutilized IT. That's not the case with Nutanix. You start small and you add 1 node at a time. And then lastly, as a software company, we continue to, of course, innovate and bring new capabilities to market. There are particular attributes of our software that make it really easy for our customers to incorporate these new advancements that like a cloud company, when we introduce new capabilities, our customers can put those into their production environment, nondisruptively without downtime. So they consume our software and they consume in a continuous manner, like a SaaS service. So these are the 4 fundamental reasons why Nutanix has built the business and franchise that we have. And the next slide. And the result of this, of course, is we built a pretty impressive portfolio of customers, do very, very strong in the enterprise. We can share with you the metrics. We've seen strength not only through the global 2,000 customers who have really benefited from the simplicity of our technology but we extend into the commercial segments as well. And the technology is industry-agnostic, meaning, we have good representation across different verticals and industries, and that's been a good point of diversification for the business overall. So we're very proud of the success we've had in the market. Many of these customers are vocal advocates of Nutanix. So when we have events, when we ask them to speak to other prospective customers, typically, they are rather eager. So we have a particularly both loyal and passionate customer base who have really sort of benefited from the simplicity, the elegance of our software. It's really sort of changed their professional lives as they provision and manage IT. And we become, I think, a really important and valued partner by so many of these companies as they are looking to not only modernize their data center with Nutanix software but to build a multi-cloud strategy. And we're fundamental to so many of those companies in those long-term strategies, which we can talk about. So with that, I'm going to pass to Duston, who can go into more of the financial aspect of the business.

Thanks, Greg. A couple of slides here we'll finish up on and then open it up for a discussion here, but you can see the customer momentum we've had over the last several years and continue to have right through Q3. So on our way this quarter, anyway, through Q4 to be over that 17,000 customer count worldwide. And I think we're proud of the -- Greg mentioned it a minute ago, the Global 2000 customers, but 910 Global 2000 customers in a relatively short period of time. And obviously, why the Global 2000 customers are so important is the repeat purchase multiple that we experienced with the Global 2000. So on average, you can see there, to the right, a Global 2000 purchase has purchased over 13 times their initial purchase. So there is a testament to the product as far as getting in and building with Nutanix over a period of time. And Greg also mentioned the NPS score of 90, and that isn't just a spot 90, that's over a 6-year average. And I think very, very, very few companies you'll see with an NPS score of 90. Next slide. And here's the lifetime customers -- with lifetime value of over $1 million. So how many customers have purchased product from Nutanix in excess of $1 million over their lifetime, so well over 1,100 customers are purchasing product in excess of $1 million. Again, it just shows you the repeat purchase capability here with our customer base. And you can see the other customers 163 $3 million to $5 million and over 100 $5 million to $10 million and 64 customers over $10 million in lifetime buys. And this has all been within a relatively short period of time since really the vast majority of our product has shipped in the last really 4 years, 4 or 5 years. So it's a pretty rapid growth and pretty, I think, impressive performance on the large customers. Next slide. One of the big, big, big focus items over the last several years have been us transforming the business. We originally first started out as an appliance business with the software attached to the clients. And then during FY '19 -- FY '18 and '19, we started this process of not recognizing the revenue anymore because the software and the hardware -- because the software was pretty much ubiquitous running on any server. So we shed ourselves of all the hardware revenue rec. So that was the first transition there. And then to the right there, what we're focused on now over the last 1.5 years or so is taking all that software base now that we have, starting out $1.5 billion, and transferring that into a full subscription business. So as of last quarter, well over 80% of our business had some term associated with it. So subscription-based products. So that's been the real focus here over the last year as we continue to build a pretty substantially sized subscription company. If we go to the next slide. Some of the benefits from a subscription model, from a customer perspective now, previously, a customer had to buy our software attached to the server. So if the server lasted 5 years, the software value that they would have to procure upfront would be roughly 5 years of value. Now with subscription options here, a customer can effectively buy monthly, they can buy a year at a time of software, 3 years, 5 years. So it gives them great flexibility from that perspective now. And now they have license portability between public and private cloud. So these licenses can move back and forth from that perspective, they get continuous updates and things like that. So a lot on the customer side, a very beneficial. And then over time, from a Nutanix perspective, it gives us a much more predictable business as we go forward because we had previously licenses were sold on the life of device. So as long as the server was in use, the license continued. So it wasn't really sure when the servers would go end of life. But now with a subscription model, we have fixed terms. We know when that renewal comes up, and it ultimately gives us a much more predictable business model. And not only that, ultimately, like a lot of or most every other subscription company, those renewals come at much lower cost. So we're excited to get into that era of the business here, shortly. Next slide. And here it shows the exact subscription percentage of the business, both from a billings and a revenue mix. So you can see we've really transitioned quickly over the last 1.5 years or so. So billings are up around 84% of last quarter, revenue mix of 82%. So over 80% of the business, again, had a fixed term associated with it in Q3, and that will continue to eke up a little bit. But effectively, we'll get a vast majority of the business here transitioned to subscription over the next year or so. Here are some of the subscription highlights. Of course, the subscription billings have grown rapidly, 43% year-over-year growth. This is just Q3, so $321 million in billings, subscription billings, in Q3. You can see the growth there in revenue and our average contract term of about 3.9 years on average. Although, again, we do monthly, we do 1 year, 3 year, 5 year, but right now, the average is about 3.9 years. And here, probably the 2 most or 1 of the 2 most important metrics here, retention and expansion rates because in order to have a successful subscription business and dependent on renewals that we know the renewals will happen, here is a really good example of retention rate, roughly 97% on an annual basis. So very good retention rate with the products getting stickier and stickier. So that's really good. And the net dollar-based expansion, I think, is in -- clearly, in the upper tier here at -- this was at the end of FY '19, but 132% net dollar-based expansion rate, which again, talks about the product, the repeat purchasing of the product, new products that we're introducing for customers to continue a pretty good net dollar-based expansion rate. Next slide. Gross margins, they have come up around 81%. They will probably continue to hover around 81%. When we were appliance company a few years back, those margins were about 60%. So clearly, it has now reflected a pure software business. Next slide. Deferred revenue. One of the things that I think people miss a little bit, where we put an awful lot of revenue back on to the balance sheet in a deferred nature, roughly every dollar we bill, roughly 45% or so goes on to the balance sheet as deferred over the life of the license now. So we ended Q3 with $1.2 billion of deferred revenue on the balance sheet. And you can see that growth rate over the last year, about 34%. So a lot of deferrals going on to the balance sheet, obviously, rollover, over time, as the license goes over the license period. Next slide. Probably, I think, the last slide here probably, and one of the most important slides here. And it's something that we've been talking about quite a bit recently is that we started this transition again to subscription roughly 1.5 years ago, a little bit more, with average terms of 3.9 years. So we haven't had $1.5 billion run rate. So we did it at size. But today, a fair amount, less than 10% of our business is renewals. So effectively, over 90% of our business is new and upsell. And new and upsell is tough business to do from a cost perspective because new business is very costly to transact. Upsell is still costly. It's less costly. It's less costly than new business, but it's still fairly substantial cost to go do that. And it's not -- you can't predict that business perfectly. So today, a lot of it, 90% plus is that. When we go to the future here, because we know that the renewals will start maturing over the next several years, and specifically, in FY '23, it gets very interesting is that, ultimately, the renewal percentage of our business becomes substantial. So what we do is, we reduce the dependence on new and upsell, and that business is less predictable and more costly. So we bring the cost down, and when we replace it with predictable low-cost renewals, ultimately driving, obviously, leverage in the business because of the renewal flow. So that's what we've set up here over the last couple of years. And we'll start to reap those benefits over the next few years. So we're excited about what this brings to the business model over time. Next slide. So in summary, Greg talked about the product a lot, differentiated multi-cloud platform. We've got a great product coming out here shortly, called Nutanix Clusters, that bridges on-prem and off-prem in a seamless manner. We're very excited about that. It's a big opportunity, a lot of growth drivers. Customers are very happy. We've set up a nice subscription business that I think will yield -- ultimately yield to some pretty good operating leverage over the next several years here. So we're excited about that. And I think with that, Shane, if you could advance to the next slide. I believe that's it, yes, perfect. So with that, I'll send it back to Jared. And we'll have a little discussion here, a little bit more, maybe deeper on the business and some other things.

That's perfect. Thank you for that overview, Duston and Greg. It was quite good, and we're getting a lot of questions here. And I think maybe it makes the most sense just to start with Greg. You've obviously mentioned the evolution of the product portfolio over time. Getting a lot of questions in terms of how to think about the migration to the public cloud and how Nutanix is positioned for that? So maybe let's start with that, and we can expand from there

Yes. I'll talk about what we're seeing today, and I'll talk about very briefly what we're going to do going forward. So first of all, we think that the advent and adoption of public cloud has been a tailwind for our business it's helped. It's helped demonstrate the possibilities of how to deliver IT in a more efficient manner. So it's really served as a catalyst for companies to invest in their own IT to bring more cloud-like capabilities. So that's really been sort of a great driver for -- to bring hyperconvergence into the data center is to bring more cloud-like capabilities to their IT infrastructure. We see today that companies are best served by running applications in the public cloud that are unpredictable in nature, whereas application that have predictable demand characteristics run better with a lower total cost of ownership, better economics in the data center. So we work with our customers in their decision about where to run workloads and where to manage data. And the split we see today is that we know we can provide not only a cloud-like experience in the data center but we can run the majority of a customer's application of their workloads on Nutanix software as efficiently but at a lower cost than they can typically run in a public cloud infrastructure. Now going forward, what we see is customers are building or working toward a hybrid cloud operating model. They want the ability to not only have a private cloud infrastructure but to take advantage of AWS, Azure, Google Cloud. But they want a hybrid cloud architecture that allows them to lift and shift workloads between those environments. Duston mentioned Nutanix Clusters, which is upcoming. That is our solution that allows our software, our full stack, to run not only in a data center on any drive or hardware but to also run in the public cloud to run on bare-metal instances in AWS, for example. And what that allow our customers to do is to seamlessly extend their data center into the public cloud, operating with the same model from the same single pane of glass. And then because Nutanix software is running both in the public cloud as well as in their own data center, the same environment, same construct, same tooling, applications can easily migrate between the 2 environments. So clusters will allow our software to run in public cloud and allow our customers to build a hybrid cloud capabilities. And that is sort of the broad sort of strategy for the company at this point.

That's helpful. And then it sort of tied into the next question that I'm getting, which is the accelerated move to the public cloud viewed as a threat or as an opportunity. But I guess if I would -- just listening to what you're saying, maybe rephrasing that, it sounds like your view is -- your customers view hybrid as basically the way of the future, which I think is consistent with how Azure use it. Obviously, Microsoft has taken their massive installed base, and that's been incredibly successful from an Azure perspective. So maybe just expand on that a little bit in terms of just the notion that hybrid is really the way of the future?

Yes. I mean you've seen 2 things. You've seen traditionally on-prem companies and other instance include Nutanix in that category, extending their on-prem footprint into public cloud to meld their capabilities, their services into a hyperscaler into the ones that you mentioned, Jared. At the same time, you see the public cloud vendors want to extend out to the data center that they realize -- everyone now realizes that companies need both public and private clouds. But what they need is a common operating model. What they are striving for is they want to be able to manage the environments cohesively because too often, the sort of the fragmentation, the silo lean that we saw in the data center, that we provided the consolidation, we're now seeing the same challenges as companies have multiple clouds that when I bring on Azure, when I bring on AWS, too often, I have to spin up a new team. I have different skill sets to manage workloads in a public cloud as they do it in private cloud. So companies want to simplify. They want to converge their cloud operations and management. And that's where we're trying to do with clusters and the entire portfolio.

As a follow-up to that, getting a question on how to think about on-premise database workloads. How -- just sort of thinking about it in the context of concerns that database as well move to the cloud, whether it's the Oracle Autonomous Database, which Larry talked extensively about last night on his earnings call as the way of the future or the MongoDB Atlas cloud. How do we think about that relative to Nutanix?

Well, I think what we see, what customers tell us is, what's most important from a database specifically is the operational overhead to manage those databases is pretty high. Of all of the workloads in a company like portfolio of applications, databases require among the most maintenance. So you've seen this push to provide database if not as a technology but as a service, and that's what you are talking about, Jared. But providing databases-as-a-service is not the strict province of public clouds, right? We are doing that in the realm of private clouds as well. So part of our cloud stack built upon the hyperconverged software is a database-as-a-service product that we call Era that has demonstrated that we're very, very pleased with its success. It's become one of our more popular products. And it's the idea that I turn databases into a service where internal customers can automatically request a database, the profile has been preapproved by the IT administrator. The database incidence gets provisioned. IT can automate the entire life cycle of that database from its patching, to its protection, to its updating. So database-as-a-service, we see adopted both in public clouds, but we're all seeing it with our cloud stack as well. And we're going to bring the same database as a service to the public cloud as well via the clusters technologies that we've talked about.

That's helpful. Maybe just a couple of obligatory COVID-related questions. Maybe first on the go-to-market front, how are you thinking about sort of operating in this environment? We've moderated a couple of firesides over the past few days, and how you're thinking about the ability to close deals in the context of the current environment? And then maybe as a follow-up to that, I think you had a really strong Q3 with your VDI and desktop-as-a-service products? I think it was almost 30% of TCV. So maybe just expand on how those products are positioned in the context of the current environment?

Yes. I'll do the first part, and Greg can talk a little bit about the products. How do we operate within COVID environment, well, everybody adapts both businesses and individuals and things like that, and we adapt also. If you break our business into 2 pieces, we've got the new business, and then you've got the existing customers. And last quarter, that was about 20% new business, 80% existing business. So in this world of virtual environments here, the new business is a little tougher just because a customer isn't familiar with Nutanix and the simplicity of the product and the ease of use and things like that. So it gets a little tougher from a new customer. From an existing customer, we've learned to adapt quite well because, again, the customer understands the product and understands Nutanix, he understands a lot. So it's more of a continued discussion that you can have just like we're having today in a pretty effective manner. So I think we're doing things a little differently. I think interesting to folks, our sales folks in EMEA, are probably a little bit more anxious to get back to that interaction, and they want to start opening up some offices and things like that. So I think that will be probably the first area. In APJ, we're doing some of that. So I think it's starting to get a little bit back in some of the countries there. But I think we've adapted quite well. And I think it has forced us to think differently long term, not only during this period but how can we really do things more efficient long term. And maybe we can do more virtual-type things. And maybe we don't have to have as many in-person type of events or maybe we can do demand generation spend a little differently. So I think there's going to be a lot of good coming out of this. But in the short term, again, new customer development gets a little harder in this environment. You mentioned VDI and user compute. That popped up to about 27% of TCV. Our heritage lens to that type of solution back when we first started, 70%, 80% of the business was VDI. Historically, over the last couple of years, that's around 18% to 22%. So it's popped up a little bit, but not substantially at the 27%. So I think it probably hovers between that and 20% here as we go forward. Maybe just a little quick talk on the products and why the strength we're seeing in VDI, not only from just a demand perspective but the capabilities of the product, right.

Yes. Just quickly, Duston mentioned, we have a long heritage in supporting VDI. This -- so this is Citrix, VDI as well as VMware Horizon View. And the reason Nutanix software is great for owning VDI is because we scale so easily. So customers, if they're going to increase the number of users to which they have to deliver virtual desktops, like when they are working from home, if they have to go buy more Citrix licenses that they have to increase or scale out 50%, for example; with Nutanix, they just buy more licenses from us to run Citrix on. They don't want to set up a new environment. They can add that to their VDI deployment in minutes. And so it's a great solution to deliver virtual desktops. So Citrix software runs on Nutanix hyperconverged infrastructure, and we just scale out, and we can scale out without limit. And we have customers that are running literally tens of thousands -- delivering tens of thousands of virtual desktops to customers. So it's been just a great workload for us, but it speaks to the power of the platform that we can deliver everything from databases to containers, to VDI, and high-performance compute, nearly any workload runs on the platform, which makes it very versatile for the customers.

That's great. Maybe, Duston, a couple of finance-related questions. I think during your opening remarks, you mentioned the importance of repeat purchases and getting a few questions on this. In terms of just understanding how to think about the unit economics of a refresh deal? All else equal, if someone bought, call it, $100 of Nutanix software 3 years ago, when that refreshes, what is the pricing and contract size uplift look like in the context of a renewal?

So yes, so there's really 2 pieces there going forward or historically. There's the initial deal, so what's the initial deal look like and that depends on the customer. Obviously, a commercial customer would be small. Global 2000, it wouldn't be unlikely that, that's in the $500 to several millions of dollars on a new deal. And then, to the beauty of our product, with the net dollar-based expansion rates I showed you there, is that we upsell all day long. It's either new capacity, new workloads, new products, new something, and then ultimately, you get to a renewal. And so from a renewal perspective, again, we have not had really any history yet. We had roughly $5 million of renewals. Our first really measurable amount of renewals just because of the timing and when we started the subscription business. So we don't have a lot of history there on pricing and things. But most companies, they -- a lot of subscription companies, they sell something. There's not a ton of upsell and then the subscription becomes due and renewable and then they talk about upsell and then they go from there. Our business, we're going to upsell, upsell and upsell. Then the renewal comes, we may do a bunch of coterminous things at that point in time, and then we'll go extend the license for another X amount of years or months or whatever. So we would expect the retention rate to be very high, and we'll probably do some upselling at that point. But again, we've already upsold -- if we did a 3-year deal, we've been upselling for 3 years effectively there. I think even the more important thing is what's the cost structure between new upsell and renewals. And that's where the business model starts to play because if you take really new -- and at some point here, we were going to do this at the Investor Day in March, and obviously, we had to push that out and we need to figure out when to reschedule this. But we were going to show if new business costs X to transact, probably upsell is in the range of 50% of the new business cost. And then if you look at renewals, it's going to be probably 80%, 90% more efficient than new business. So you can just see how the mix shift in the business over time affects the financial dynamics of the company over time, because again, there just should be a lot less effort and friction on a renewal over time, especially as the product gets stickier and stickier. So it's going to be fascinating to see how this plays out. We're excited about it. We're setting up processes internally to make sure that the renewals get renewed efficiently and effectively and we maintain that 97% retention rate. And that's what we're doing kind of in the background with Chris Kaddaras and the sales folks, trying to set up that org to take renewals and do that efficiently.

Well, I think that's a really important point you sort of look at enterprise software companies at scale. They drive the majority of their ACV from existing customers, not net new logos. And obviously, they're generating quite healthy steady state free cash flow margin. So I think that makes sense. And I guess I'm actually getting a question in line with that view. How do you think about the time line to get to free cash flow breakeven? And what is your long-term margin profile?

Yes. So timing on the free cash flow, I think at some point, we'll have to look at some external numbers, again, associated with an Investor Day and things like that, but we'll probably give a view if terms don't change. But if terms do decline, then if we're -- I'll make up numbers. If average deal terms are 4 years and they go to 3 years, obviously, we're going to have less collections there upfront. But it's all good for ACV because the shorter the term, the lower the discount, so ACV goes up, the growth rate for ACV goes up and the quicker we get to an efficient renewal. So it's highly dependent on what terms are doing. We're going to transfer over to an ACV-based comp here shortly, beginning of our fiscal year in August, and that will have some impact to terms. But again, finally, I'm excited about ACV comp. We have to do it right, obviously, but I'm really excited about it, because finally, the reps, the sales reps and the company's objectives, meaning maximization of ACV finally come in line. Because prior we were selling -- we were comping reps on TCV, and they wanted to maximize TCV at all cost. So it will be fastening here to go forward. But I mean, ultimately, we shouldn't, over time -- now we need to get to a point like most subscription companies that have 40% or 50% of their business coming in as high-efficient renewals. But I think once we get to that state, fundamentally, there's no reason why we -- our financial profile over the long term shouldn't be any substantially different than any other successful subscription company.

That's great. We're coming up on our time here. So maybe just one last one. You've obviously been going through a lot of transitions, and I think you did a great job from an overview perspective. But what do you think is the most misunderstood aspect of the Nutanix story? There's obviously a lot of moving parts, but if you have to just boil it down to 1 part of the business that you think is misunderstood, what would it be?

Well, I think it's misunderstood, I think, on the product side and I think on the financial side, quite honestly. I think when you look at the product portfolio and what we're doing, really building the product up to stack and the level of simplicity that the product exhibits and things like that. And I think people are discounting probably the new products and the impact not only for future business but on the core and the level of stickiness. But on the financial side of the equation, I think it's clearly what we've been doing to build this business for a subscription-type business. And there's been a lot of messiness over the last couple of years with this movement. But again, what we started talking about is there has to be an ROI on everything that we've done here, moving to a subscription business. And so far, it's been mostly investment. But what's the ROI on that investment? And the ROI on that investment is to get to a highly efficient subscription business with renewals and things like that. So I think as people understand what we're doing and really building that up for the future and how the efficiency plays in, I think, ultimately, people will have a different view of the company. I think the really important thing is here, we're shifting higher risk, higher cost, new business and upsell and replacing some of that with lower risk, lower cost renewals. And we'll still -- obviously, there will be a mix of that, but you'll see the business shift, and I think the financial profile of the company will change substantially over time.

Perfect. With that, Duston, Greg, thank you so much for joining us this morning, and I appreciate everyone who is listening in. Thanks, again, for your time.

Yes. Thanks for hosting us. Thank you.

Thanks a lot. Have a great day, everyone.

Okay. Thank you.