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

Ladies and gentlemen, thank you for standing by, and welcome to the End-User Computing Tech Talk Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to Tonya Chin. Please go ahead.

Thank you, Denise. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of the Nutanix website. I'm joined by Nikola Bozinovic, Nutanix' Vice President and General Manager of Desktop Services. Thanks for joining us, Nikola. We'd like to remind you that during today's call, management will be making forward-looking statements within the meaning of the safe harbor provision of federal securities laws regarding the company's business plans and objectives; expectations regarding products, services, product features and technology that are under development; competitive and industry dynamics, potential market opportunities and other business-related information. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update or revise these statements after this call. For a more detailed description of these risks and uncertainties, please refer to our quarterly report on Form 10-Q for the fiscal quarter ended April 30, 2020, filed with the SEC on June 4, 2020. Copies of our SEC filings can be obtained from the SEC or by visiting the Investor Relations section of the website. Finally, a supplemental slide deck can be found in the Events section of our IR website that accompanies this presentation. As a reminder, no financials or projections will be discussed on today's call, and we thank you for your cooperation in advance. With that, I'll turn the call over to Nikola. Nikola, go ahead.

Thanks, Tonya. And we're going to start this at Page 3. And today, we're going to be talking about end-user computing and how Nutanix is really helping transform the work for millions of people and thousands of companies that are dealing with this fast-changing environment. One thing that is very clear is that the coronavirus pandemic has changed the way we work. And there will be a new normal wherever we end up in a year or 2. After this, things will definitely not go back to the old days of traditional desktops at the office and rows of desks and that will be the new reality for most, if not, for all employees. So with this backdrop, end-user computing technologies, that we often refer to as EUC, are letting organizations be truly agile and flexible, and they can deliver services for both their employees and their external customers. And instead of using physical devices, ordering, shipping and configuring laptops and desktops, they can literally configure these things in minutes, and that really means that everything is moving at a much faster pace and that the new desktop, once the system is configured, can be ready in 4 to 6 minutes and sometimes the applications are ready in a matter of 1 minute. Moving over to Page 4. I want to take a look at why Nutanix is so good for end-user computing and for end-user computing foundation. It's something that we've been doing for the last 10 years. We have thousands of customers and millions of end users that are waking up every day and looking at Nutanix to deliver a platform on top of which they do their work. And in fact, since the end of the third quarter, last fiscal year, a year ago, the percentage of our overall business of TCV bookings that we have on the end-user computing side has gone up from 18% to 27%. And we have seen a great interest in a variety of our end-user computing solutions. Moving over to Page 4 (sic) [ Page 5 ], Nutanix, really, with this DNA in end-user computing solves the problems that have been plaguing over the last 10, 20 years, anyone who has strived to deploy a VDI solution. And we're talking about things like long deployment times, taking big capital investments upfront to invest in both software and hardware, and then solutions that don't scale and ultimately end up with unhappy end users. In the survey that IDC did, more than 40% of companies say that they need to move faster, that puts down even before the pandemic. So it's pretty obvious that the solution from the Nutanix that allows for rapid deployments, byte-size consumption, scaling as the customers grow and provides a great performance for end users is what is making companies really, really exciting and having them as happy customers. So what is really crucial to our success with VDI so far is that we can seamlessly replace infrastructure that customers are running in their data center. And that means that customers can get nearly instant gratification, which is critical in -- at these uncertain times. And we talk a lot about infrastructure and cloud, and that really means different things to different people. Obviously, public clouds like AWS and Azure and then Google have been getting a lot of attention, but there are different flavors of the cloud. And the reality is that this type of workloads, end-user computing, virtual desktops, are today, more than 90% on-prem and will be continued to be delivered from data center and from the cloud from many years to come. Some of the reasons includes control or data residency or just performs and the latency that is critical to end user experience. So moving on to our own solutions for end-user computing to Page 6. For customers who want the best solution for their private cloud and for the hybrid cloud, Nutanix has been delivering for the last 10 years, industry's best platform, hyperconverged platform for windows -- for virtual desktop environment, or short, VDI. And we're going to talk more about how this core foundational workload has been developing and evolving at the time of pandemic, but we're also seeing a shift to a new modality and a new delivery model that is sometimes even more instant, and it simplifies the delivery of desktops -- virtual desktops-as-a-service. And we see day-to-day in all our activities that as a service model is something that companies, especially those facing shortage of resources and sometimes shortage of talent, are looking for where the responsibilities for maintaining and managing the platform are transferred to a vendor, so desktop-as-a-service is definitely a very fast-growing trend. And ultimately, we are seeing that the push towards adoption of multi-cloud services where customers wants different options and they want flexibility. So moving on to Page 7. Let me talk about our core offering, Nutanix's platform, for end-user computing, which is traditionally used to run virtual desktops, or VDI. Many companies who started with VDI 10 or more years ago are coming from industries that are traditionally invested in the technology talking about health care, financial services and banks, insurance companies, retail companies. They recognized the need to use VDI many years ago. And at this time, particularly the last couple of quarters, they've been coming back for more and they've been doubling down on their existing VDI investment. It's really for distributed enterprises like remote office, it means something very different these days. It used to be 50 or 100 people in a branch. Right now, each of our homes is the extension of an enterprise IT environment. And on Page 8, we really committed and are strongly committed to flexibility and choice and something that customers can take advantage of on many different levels, starting from the hypervisor, but then also moving on to a form factor where are they going to get their service from, and ultimately, what the configuration of their system is going to look like. And that is solved through our channel, but we are increasingly getting great traction with managed [indiscernible] and GSIs, [ Prism Pro ] to add even more options to our customers. There is something very unique on Page 9 that I want to highlight, and it's something that nobody else in the industry has. It's a solution, a licensing solution and packaging solution and product solution that cuts across different parts of our portfolio to provide best features from our core technology, which is AOS, but then also goes on Prism, obviously then files and flow. And the big part of [indiscernible] is that customers can get best of everything that Nutanix has an -- has to offer in a per-user license model. And it's a very unique for an infrastructure company to provide something on a per user basis. Usually, that's tied to a number of devices and nodes or number of cords. In our case, when we look at how end-user computing solutions are sold, there is a user in the middle of end-user computing, and everything is on a per user basis. That's how licenses for VDI software brokers are sold. So we developed a license that can also make the sale and deployment a lot easier because customers don't have to go through a big sizing exercise, do they need to run this on a small or a large cluster. And ultimately, they can split the licenses between on-prem and hybrid cloud. So it really eliminates the variable cost of infrastructure software. Customers can pick what hardware or whatever hardware they want to use and have a predictable byte-size software infrastructure to run up. Over to Page 10, all of our technology advantages starts with the core. The key advantage of hyperconverged infrastructure, which is linear scaling with adding more nodes to the cluster. It really shines when it comes to end-user computing because that's how companies usually deploy end-user computing technologies in VDI. You start with 500 users on a handful of nodes. And then you need another 500 users, you would just go and add a few more nodes. The data locality that is the core of Nutanix technology so that traffic doesn't travel over the network. But everything really happens inside the nodes, inside the machine on the PCI express bots is giving us best performance and also best resilience. And on Page 11, it's really, if you look at the end-user computing, you see at the top. It takes advantage of all services. And we are grouping our portfolio of products into these 3 big categories. Of course, it starts with our digital, hyperconverged infrastructure. But then around data center, DevOps and desktop services, we have different products than when packaged and licensed can really simplify the -- both the sales process and the deployment process for our customers in end-user computing. And really in the next couple of slides, starting with slides -- starting with Slide #12. I want to highlight a couple of products. The first one is our files product, which eliminates the need to have a stand-alone NAS, and it is built-in with the rest of the Nutanix platform. And if you use desktops, even physical desktops, it's really your data that sits on your desktop or in your C documents folder. With files, we really have a great scalable robust solution to store user profiles, home directories and even departmental shares. So it's something that otherwise would have to be a stand-alone with Nutanix solutions for end-user computing. This comes in built-in, both as a -- on a product level and at a license level. Moving on to Page 13. For security and for securing the VDI environment, the traditional approach was to really overcomplicate network architecture, put each group of users into its own virtual network and then build sometimes hundreds of policies on top of it, which really slowed everything down. Flow is a solution that allows for a built-in micro segmentation where both inbound approvals and outbound approvals can be easily configured based on the belonging to, for example, a group policy to a group in the active directory. And finally, on Page 15, I want to talk about one of my favorite topics, which is our clusters, Nutanix Clusters. And how can we help a solution like Citrix that customers are using in large numbers on Nutanix on-prem platform. How can we extend that to the public cloud? We have lots of early access customers today. And it's a product that we are really, really excited about and what we can do for a hybrid cloud future of work where the same fabric can run both on-prem and in the cloud, where there is minimal efforts and investments needed to migrate the workloads and it really provides the best of options for either sustainable workloads that are running on-prem or elastic workloads and elastic desktops that are running in the cloud. So how does that really work in practice? And on Page 16, this is a real customer example. It's a customer that's been with us for a while. It's a JetBlue Airways that is using our private cloud solution, that's built on our own AOS and our hypervisor AHV. On top of it, they run Citrix virtual labs and desktops. And the solution is delivered through Nutanix consulting services. They reduced the time for adding capacity from sometimes many months to literally hours from the moment that the hardware hits their dock. And they gained in also a business continuity and built-in redundancy for their critical workloads that include call centers at this time of heightened uncertainty for all industries, including airlines. So moving on to Page 17, the question that we asked ourselves after seeing how customers want to have more flexibility and how they want to move faster, is how can we move beyond even traditional virtual desktops? What is that we can do to offer crisp all-in-one solution from Nutanix? And we came up with desktop-as-a-service solution called Frame. It is a virtual desktop-as-a-service offered by Nutanix, and it's used to securely connect users, apps and data anywhere and on any device. Customers like it because it's easy to configure, easy to deploy and it just works. It is what is in the Nutanix's DNA to simplify complex IT problems and to get to the value very, very quickly. So we are seeing, in fact, a very interesting bifurcation of customer base and interest between the core VDI, that runs on Nutanix platform, most often on-prem, and desktop-as-a-service. We're seeing technology companies that are also changing the way they work. Maybe they have not adopted VDI 10, 15 years ago, same way as banks or hospitals did, but are now committing to the future of work where bulk of their workforce will be remote, sometimes indefinitely. And there are Silicon Valley companies that are leading the way and committing to that. So we are seeing how the total opportunity is growing to deliver these next -- the next-generation of virtual desktop solutions to technology companies, also to schools that sometimes just didn't have resources or sophisticated skills required to develop -- to deploy VDIs, but right now, with desktop-as-a-service and shift to online and remote learning. There is a huge interest in education, also governments at all levels, from federal to state to local are deploying desktop as a service solution. So on Page 18, it's just a simple illustration that in this new world that is all about the Internet, web and browsers, it's truly possible to even deploy something that used to be very complex as virtual desktop infrastructure from a browser on the laptop. We're talking about thousands of desktops deployed very, very quickly. And then delivered to browsers on virtually all devices. So that is the future that SaaS companies showed us over the last 10, 15 years. And I think that same ease of use is coming to virtual desktops on the infrastructure side. So on Page 19, there is a really simple illustration on how answering a couple of questions and clicking on a couple of boxes in the user interface, this really works and this really happens. So from picking where the virtual desktops are going to be deployed, on-prem with Nutanix or on some of the public clouds or when clusters go GA on Nutanix in a hybrid cloud environment to configuring the access through some of these solutions that are very popular for a single sign-on, like Okta or Azure AD and then configuring a set of applications, connecting them to files that could be residing on the Nutanix's solution or on Dropbox, Google Drive, One Drive. That's all can take sometimes hours, not more than that. And it used to be months or weeks and then deliver secured company issued virtual desktops to end users. On top of it, customers, they don't need any special relationship with the cloud providers. Of course, they can bring in their cloud subscription if they're already an Azure shop or AWS shop or Google shop. Yes, of course, they can use their credits. But even if they just say, "Hey, I need 2,000 desktops later today." They can do that without establishing that relationship with anybody else, but Nutanix. And also by using this product, this multi-cloud product and the single pane of glass, not only user experience grade, but also they avoid being locked into a single cloud infrastructure vendor. Moving on to Page 20. I really want to highlight two things that this solution is not a software. It is a real service that is hosted and managed by Nutanix. Updates are exactly the same as for any other SaaS service, so Salesforce gets updated or Gmail gets updated or Office 365 gets updated. The control plane and the SaaS component is managed by Nutanix. Customers are in full control over content and configuration of their desktops, and they can choose to run them on-prem in the public cloud or in the hybrid cloud. And there is a real usage data that we've collected on Page 21 in our fiscal Q3 that ran from February 1 through the end of April, earlier this year. It just shows that this multi-cloudness is not just a story, it is real, and that we see usage for Frame that is equally split across a number of different options. Of course, we have customers running it on Nutanix AHV. But also across Azure, AWS and Google, have a growing number of customers and are deploying more than one solution. [indiscernible] for uploads, they can run their own data centers, on-prem. There is also [Indiscernible] TCO, total cost of ownership and economics. And then for elastic workloads or for spikes in capacity, they can go to any of the clouds one or more that we support. So customers really like this choice. And moving on to Page 22. They like that this is a modern solution. It is built for multi-cloud. It instantly scales. It is secured by design. And at the end of the day, provides them with a great, robust, yet very agile solution to deliver virtual desktops across a number of industries. And on Page 23, I really want to highlight 3 segments where we've been having a lot of success with Frame. U.S. Federal is one, and the success there is really spreading to both -- there is not only a great performance of the products, but we have achieved the highest level of certification. It's called FedRAMP certification issued by U.S. government that gives different federal and state and local agencies assurance that we are adhering to the best security practices. And it's something that we are very proud of. And we're very proud of that during these times, we're helping our government employees provide services to all of us in times of need. Education is another big break for us. We all know that the end of this past full year has seen a lot of change. And hopefully, we are still not sure what the next school year is going to look like, but the future of learning will not be the same. The same way the future of work will not be the same. And there will be some or more of distance learning involved with every K-12 and higher ed institutions. And we're working very, very closely with number of schools, also a number of school districts and sometimes even states to deliver relief for millions of kids and hundreds of thousands of educators, giving them choice to deploy everywhere, and really focusing on what is a very popular device and endpoint in schools over the last maybe 5 years. Google's Chromebooks really got to dominate the endpoint market in schools, especially in the U.S. So Frame with it's web-first, browser-first approach is really doing great in that market. And then finally, on we talked about technology companies that maybe have not been the first vertical that comes to mind when it comes to VDI, but now with distributed workforce, they are also looking at modern desktop solution and virtual desktop solutions. And on Page 24, I want to highlight a customer, it's Maryland Lottery, that in the heights of the pandemic really came to us to look for a solution for teleworking for hundreds of employees at the time when their offices were closed, and we were able to deliver solution for them using our Nutanix Enterprise Cloud Solution with AHV Hypervisor, with our Prism and Prism Pro managements solutions and then running Frame on top of it. They were able to deploy that literally in a matter of days and assured business continuity for what is a very important source of revenue for the state of Maryland. So with that, I wanted to thank you for your time and open it up for questions.

[Operator Instructions] Your first question comes from Nick Heisler with SFG.

I just want to ask a quick follow-up in terms of thinking about these offerings from the perspective of customer in light of the pandemic and everything that's been going on. How do decision-making processes change between the initial focus on business continuity versus the long-term shift to the workforce to some extent?

Yes. It's a great question. And we've seen clearly a big change from, let's say, March and April, the panic buying season, where there were two groups of customers that we saw. There were customers who were rapidly expanding their capacity. Because before pandemic, they had certain groups working remotely, others were working at the office. But all of a sudden this large spike in capacity demand really was something that we were able to help with. At the same time, there were customers who didn't have VDI deployed, and they came to us looking for a solution they can stand up really quickly and instantly. So those were two sides of the barbell that we were able to deliver for the folks in March and April. As the companies are getting, I'd say, more accustomed to the new situation, we're seeing much longer horizons in our customer engagements. And this is all centered around something that I already mentioned, which is the future of work. Things that everybody thought are going to take 5 years, 7 years, 10 years are happening in a matter of weeks or months. And they realized that even with the surge in pandemics, slowing down and going back to some new normal, not only they want to provide their users with this sort of technology, but that business continuity is probably more critical than ever. And that fortunately, we'll have a solution for COVID-19 and coronavirus. But I think it opened many, many thoughts on owning and being ready versus ramping and not being ready. And I think that's a long-term change in behavior where we are really well positioned to talk to customers about multiple products, both traditional VDI softwares that I covered in the first part of the presentation and desktop-as-a-service offering and then mixing and matching the two.

Perfect. If I could just ask a quick follow-up. Thinking about kind of the long-term halo effect on having these long-term conversation. Would you also expect in the long-term working -- shifting to a VDI or desktop-as-a-service model would actually increase the need for hyperconverged infrastructure on-premises or in the cloud because all your resources need to be more centralized versus, let's say, in a traditional model, saving my files on my computer, the centralized resources aren't being constrained in the same way?