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

Good afternoon, everyone. Thanks for joining our fireside chat. I'm Jason Ader from William Blair. I'm pleased to introduce Rajiv Ramaswami, President and CEO of Nutanix; and Duston Williams, CFO. Before we begin, I'm required to inform you that a complete list of research disclosures or potential conflicts of interest is available on our website at williamblair.com. Also, if you have questions, please put them in the chat, and I will get to as many of them as I can. With that out of the way, Rajiv and Duston, thanks for being with us today.

Thank you, Jason. We're glad to be here.

Great. Let me start with you Rajiv. You've now been at the helm of Nutanix for 6 months. What are your main observations so far? And what are your near-term priorities for the business?

Jason, look, what brought me in Nutanix is what I continue to be excited about now, the huge market opportunity. The positioning of Nutanix in the market as a company whose solutions are well liked by customers, very high Net Promoter Score, customers just like the company, like the employees like working with us. And when you combine this with the work that's already been done, the hard work that has been done to transition to a subscription revenue model, it puts us in a good place for us to get to that next $1 billion and beyond. And from a product perspective, again, we are helping our customers on their journey to multi-cloud. Now in terms of priorities, we laid that out in a couple of earnings calls ago, my first earnings call, and they're around these. First is we need to simplify our product portfolio and focus on selling solution sets that address customer problems. We had a rich history of innovation, many point products. And these -- many of these newer products are actually doing quite well, but I think we have a significant opportunity here for bringing these things together into solutions. The second priority is around expanding and deepening our partnerships to help penetrate larger accounts as well as provide more scale in terms of how we go to market. And this is around partners, OEM partnerships, cloud partnerships, ecosystem partnerships as well as all our channel partners. Then it's about completing that journey to -- transitioning to a subscription business model that we're already well under -- we've done the paperwork. 90% of our business today is subscription, but we are just about to get to that benefit of all the renewal stream coming in going forward. And then of course, we have to focus on disciplined cost management to continue to drive growth at the same time, focusing on delivering free cash flow positivity as well as profitability overall. And while we do all this, continuing to build our employee base, continuing to focus on diversity of talent, cloud and experience, all of that of what we need to make this company successful for the next 10 years.

Got you. And I know you announced on the Q3 earnings call that there was a modest headcount reduction, I think, primarily in the sales and marketing side. Can you talk about what you were thinking there? Are they're just additional efficiencies, not just in the sales and marketing side, but also in R&D, I mean, you have a lot of different products. Should we expect additional initiatives or actions in terms of expense management?

Yes. So I would just say, first of all, we are focused on driving growth for the company, right? Not just cost cutting. And we are focused on driving growth, but at the same time, figuring out where can we get those efficiencies that don't compromise our growth, but perhaps actually drive better alignment to focus us on investing in the areas that we do need to invest in. To that end, we've actually looked at the entire portfolio. We've looked at products, we've looked at our IT spend. We've looked at sales and marketing. When you -- in R&D, for example, over the last quarter, we brought all our product teams together. And one of our focus points here is instead of looking at just individual products, how can we actually start bringing these things together as solutions. And there's a lot of work being done on that front. On sales and marketing, clearly, we saw some opportunities here for efficiencies. As you know, we are transitioning to the subscription model. And as part of that, we are also structuring the sales team somewhat differently. We now have a low-cost renewal sales team that we've built. We took the opportunity to look at our coverage models, our segmentation models, look at areas where we potentially had some excess coverage, including some countries where we were, perhaps, had more people than we needed as well as in functions that were non-core or non-quota carrying, and we took the opportunity to reduce some spend there. As you said, 2.5% of our overall headcount, which leads to about a $50 million annual run rate savings.

Very good. What are some other takeaways from Q3 that you can share with us?

Yes. Look, Q3 was a strong quarter for us. We outperformed in all areas that we guided to. That includes ACV billings, it includes our gross margins, and our non-GAAP operating expenses. Our deal economics continue to improve due to shorter duration terms and also the uplift that we're getting from our emerging products. Linearity was excellent, and that helped us from a cash flow perspective, which contributed to better-than-expected cash flow. And then typically, one of the things that we are pleasantly surprised by was typically, we see a decline in our -- seasonal decline in our backlog during our third quarter. This quarter, we were able to hold it steady. And that really is demonstrating the strength of the demand that we had in the quarter. So overall, I'm very pleased with our execution. And look the hard work for -- over the last several quarters is just paying off now.

And is there any continued impact that you're seeing from COVID? Or how do you help investors think about the impact it's had and whether that impact is receding going forward?

Yes. There's no doubt that the impact of COVID is residing in Seating, and we are starting to see generally a normal return. We were just saying on the earnings call, actually, we've started seeing orders from casinos. And that's a sign of the fact that certain verticals that -- industries that were impacted are starting to see their businesses come back. We've seen airlines starting to pick up on traffic. Now that said, there are certain regions in the world that are very badly impacted at this point. We have a significant team in India. And obviously, there is very much -- that country is being significantly impacted by COVID as well as some other parts of the world. So I don't think we're fully back to normal, but I'm optimistic that as the year progresses, we're going to see a further uptick in terms of return to normal. And that generally bodes well for IT spend as well as investment in software of the like of what we provide.

Great. I want to dive into the product portfolio. But before I do that, I wanted to kind of address something upfront, which I hear from investors a lot, which is if the cloud is kind of -- if more applications and workloads are moving to the cloud over time, how is this not going to kind of negatively impact Nutanix' business?

Yes. No doubt. Look, I think the first thing to think about is, cloud is actually an operating model for how customers manage their environments and run their applications. And second, it's a destination, right? I think you're talking about cloud as a destination, especially when you talk about public cloud. Now my view, I think there's no doubt in the market that our customers are going to live in a multi-cloud world. And what that means is they're going to have applications running everywhere. They're going to run in multiple public clouds, AWS, Azure, Google, et cetera. But they're also going to run on-prem. In fact, there's a number of studies that say, well, even 3, 4, 5 years from now, there's going to be half of all workloads, enterprise workloads are probably still going to remain on-prem. And there are some new use cases like edge computing, where there are latency and performance requirements that actually drive workloads on-prem. And people are going to locate applications where they're best suited to be located. Based on cost, governance, security, serviceable agreements, data locality, et cetera, right. So what that really means again is we're going to be in a multi-cloud world. But there's going to be continued spending. If you look at -- for us, so we're still seeing a lot of growth on-prem, and we are not stopping there. We are investing with our product portfolio to get to the cloud, right? What we provide rather uniquely is a platform, a cloud platform that allows our customers to run their workloads wherever they want on the cloud of their choice or on on-prem and do so in exactly the same way. I mean, if you look at our history, what we did for the first 10 years of our journey was we busted these different silos that existed as compute and storage and the networking, bringing them together with HCI. We see the same opportunity to help our customers on their cloud journeys, where we think we can work across these different cloud silos. Each cloud is a silo. And they have different operating models, different set of services. We can provide a platform that helps our customers bridge across all of those, run their applications in the same consistent manner, manage all of this and simplify how they run their business. And that really is our long-term opportunity when it comes to the cloud, and I look at it as an opportunity.

And if you're running a primary workload on Nutanix, and let's say, AWS or Azure, you'd be running in that case on a bare metal instance, correct?

Yes, correct.

Got you. And what's the uptake so far of the, I guess, what is it Clusters?

Correct. So Clusters is our initial offering, and that's on AWS bare metal. This quarter, by the way, we announced that. It's also available now in AWS GovCloud for our federal customers. So if you look at the uptake, actually, we're starting to see good use cases and customers go into production with clusters. If I look at some of the use cases we've seen, we are starting to see good traction around disaster recovery as a use case, where our customers are running their workloads on-prem but then relying on the public cloud for disaster recovery. If something goes wrong, they're able to then spin up capacity very quickly within an AWS data center and then restore all their workloads from the public cloud. And that's a very cost-effective way of doing things, and we are starting to see that take off as a use case. We are also starting to see use cases around data center consolidation, people migrating out of data centers and some of those workloads heading to the cloud where they can do that very easily with our platform compared to having to refactor applications. And last but not the least, again, elastic demand, right? The cloud is a great place for you to do temporary capacity expansion. So we are pretty optimistic about clusters. One of the things that we do here is we make it really simple for our customers. It's 1 software license that they buy from us, one product, and they can just choose to use that and deploy it wherever they want. We also have an offering in the works with Azure that we hope to bring out later this year and a similar offering as with our AWS software. So it's -- we're starting to see good traction overall.

Got you. And I know you have a Leap disaster recovery product. Is that complementary to that use case? Or over time, does Leap get kind of superseded by the ability to do the DR to kind of a cloud instance that's public cloud?

Indeed. So Jason, we've always offered 2 versions of disaster recovery, one where a customer does it themselves and another where we deliver disaster recovery as a service. Both will continue. Now with the larger customers, they tend to do disaster recovery themselves, and the clusters offering is a very good offering for them to do disaster recovery to the public cloud. With our Leap offering, which, by the way, we are continuing, of course. And that's a disaster recovery that we provide, which is particularly popular amongst smaller customers where they don't have another data center or they don't -- they just want to rely on somebody else to do that as a service for them. And so we've been providing that as a service for them. And that will continue, and we will continue to drive that and make that even more cost-efficient and, of course, make it available everywhere.

All right. Helpful. And I know I kind of jumped the gun there and talk about some of your individual products, but, maybe you can give us a high-level overview of the Nutanix software stack and just kind of paint a picture for us of how you think about the stack and how it's expanded over the years?

Sure. Obviously, we started out our journey but building out this core HCI product, which brought compute and storage together. And we've done that while offering flexibility in terms of choice of hypervisor. You can download any hypervisor you like as a customer. Our customers can also run on the hardware platform of their choice. And now more recently, on the cloud of their choice, starting out with AWS and then Azure and so forth. Now on top of this core HCI, now we've added management. We've added networking and micro segmentation. We've added services for managing data like files and objects for unstructured data, the ability to deliver database -- automation and database as a service on top, disaster recovery that we already talked about. So this is entirely -- so essentially, the way to think about our stack is. We have now a full cloud platform stack with a set of services on top that enable our customers to run, manage all their applications.

Got you. And when you looked at the -- at that stack at that portfolio, what were some kind of initial impressions in terms of maybe there's a better way we can bundle this or package it. You talked a little bit earlier about solution selling? And what are some observations there from your standpoint?

Yes. I think the general notion here was, this company had a lot of innovation, and that's one of the great things about Nutanix. We continue to innovate at a rapid clip. But we were also focused on trying to sell each of these products as a stand-alone product. I think there's a lot of opportunity to be gained by actually making these part of the platform rather than trying to sell it stand alone. I'll give you one example. So we have a nice product called Flow, which is micro segmentation. And we can -- and we've been selling Flow as a stand-alone product. It's actually done quite well. Now a good way to scale that, by the way, is to make that embedded as part of a solution. So when we sell, for example, a solution for enabling remote workforce with virtual desktops, well, we can sell our AOS platform. We can sell Flow for micro segmenting and isolating different users. We can sell files and objects to enable users to use unstructured data, and we can sell management for the whole thing. So that becomes a complete solution for enabling virtual desktops. And in fact, many of our customers actually buy that from us today, except that we haven't formalized that as a solution. And what we're working on with our packaging and pricing going forward is to bring these things more together and offer it as a solution.

And I guess you're taking some pages out of the VMware playbook there?

Sure. I mean it's an accepted -- this is what software companies do.

Yes. Okay. Good. And speaking of VMware and just the HCI market, it's definitely become a 2-horse race. What are the key differences between your 2-product portfolios? And how are you faring in head-to-head bake offs? I think you said on the earnings call that you've seen an uptick in your win rates, maybe just also expand on that.

Yes. Look, I think Nutanix started 10 years after VMware did. And so from that perspective, we were able to have a clean sheet architecture for the HCI platform. And we modeled that based on how the hyperscalers were building out distributed systems for scale at their data centers. And what that means is that in practical terms, it gives us fundamental advantages when it comes to resiliency, performance and scale. And what this does, again, is it allows the platform to be run -- used for all kinds of applications, including demanding, mission-critical applications, databases, et cetera, right, health care applications. Now we've always focused on freedom of choice. So we give our customers the ability to choose whatever works best for them. So that includes the choice of hypervisors and virtualization. So we support VMware, ESX, we support Microsoft Hyper-V, and of course, our own Acropolis Hypervisor. We provide a range of hardware platforms that they can run. The customers can choose their hardware that they like. And now going forward, the cloud platform that they like. Simplicity has always been a hallmark of Nutanix. I mean, this is, again, the fact that we started out 10 years later. And also, we didn't have to think about starting from putting together say standalone compute, storage and network together. From day 1, we were thinking about how we could all bring these things together? What that means is that the product today simplifies workflows across the entire customer life cycle experience. Proof-of-concept, sizing deployment, operations. And so what this effectively means for the customer, it's is much simpler to operate -- deploy and operate our product. And again, all of this ultimately results in better TCO for our customers, right? Pricing flexibility, license portability. We have one license that allows a customer to run their workloads anywhere they want, including the cloud of their choice. That simplicity. All of that ultimately drives better TCO and also our focus on customer obsession. And really the NPS scores that we have with our customers. So all of this comes together, it provides us that competitive differentiation in the market.

Do you think that Dell coming out with PowerStore, which is kind of like a midrange storage array effects, how they go-to-market with HCI and VxRail?