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

Good afternoon, at least for those on the East Coast. Thanks for joining us. I'm Brad Reback with the Stifel Research team. Next up, we have Nutanix. From the company, we have Duston Williams, CFO; Monica Kumar, SVP in Marketing, Cloud go-to-market, and Rich Valera. I hope I got that right, Rich. I apologize if I didn't. New addition to the team on the IR side. So all, thanks so much for joining us.

Yes, great to be here. Thanks.

Thanks, Brad.

Yes. Excited to be here.

Great. Just a quick housekeeping note for those on the webcast. If you have a question, please put it into the Wall Street webcasting console, I will moderate from there. So make this interactive as possible.

Duston, maybe starting off with you. It's been almost 6 months to the day since Rajiv has been named CEO. It's probably felt like 6 days and I hope not 6 years, given the amount of work that you needed to do in that period of time. But maybe you can just highlight what he's brought to the organization, some of the changes that are early on and where you see things going. I know it's pretty broad, but good jumping-off point.

Yes. No, that's a great question. And Monica can chime in here also along the way. Yes, so last 6 months, it's been a massively busy, as you might expect, 6 months. And I'll talk about some of the specific objectives that Rajiv was focused on, obviously, the company is focused on. But I think if you step back for a second, I mean, what has he brought the company? I think it's basically, again, a level of maturity, if you will, overall to the company. And companies, again, go through phases, evolutions and revolutions. And this is another phase that it's time for a little bit more, maybe thoughtful approach to things and a bit more maturity overall. So clearly, he's brought that. I think on some of the specific objectives themselves, there's been a big, big focus, as you might expect, with the current business model, transition to subscription, the completion of that. Now that sounds simple, but there's so much underneath that as far as go-to-market, go-to-market efficiencies and productivity and demand gen and the whole renewal structure of the company and how do we get renewals flowing and how do we make sure the consumption on the renewals happen and how do we make sure they get processed at the right cost structure. So that's a big piece of it. Partnerships has been kind of elevated, the whole partnership thing. We need more help from partners, and so there's been a big, big focus there. You saw our recent announcement in Lenovo, things we're doing with Lenovo. And that includes OEM, includes cloud COGs and GSIs, service providers, et cetera. So that's kind of all encompassing. And the org itself, make sure the talent is -- the right talent is in the org, and the right talent stays, a lot around diversity and focused along those lines. And then what I've personally been involved in, obviously, is this long-term financial model that we've all been focused on over the last several months. And that's obviously setting targets for a multiyear period, getting the functional leaders, buying into those targets and developing the model. And then finally, communicating that model in a couple of weeks at Investor Day on June 22. So that's been a huge lift there. And I think we're in really good shape from that perspective. And then lastly, it's the repositioning and simplification of the product portfolio and everything that goes with that. And maybe, Monica, it's a good time for you to maybe articulate a little bit there.

Sure. I think, Duston, you've covered it so well. I'll just add a couple of sentences. For me, it's been about the ruthless prioritization and really a laser focus on execution across product, partnerships, go to market. And what he's done is really -- I mean that's what we need to, in the next phase of our growth as a company, to scale. We need focus on execution, we need to prioritize, and that's what I see Rajiv bringing to our company, in addition to everything that Duston just talked about.

So maybe following up on that, putting everything through the prioritization lens. So if we think about the product, I mean the core HCI product customers, from the time we've picked up coverage of the company and did any level of work, love it, right? I mean unequivocal, it does everything it says. Everything you say it does, it does, if not more than that. So as you think about the large expansion of the product portfolio over the last several years, how should we think about the prioritization of what's there today? I know last call, you talked about your -- in some on, sort of clusters and et cetera. But maybe help us frame that up.

Yes, definitely. I think I want to just step back a bit. When we first started with hyperconverged infrastructures, we were the pioneer of that category, and it's been a really successful solution and transformed how our customers deploy and manage infrastructure. If you take it to the next level, we are not doing the same in hybrid and multi-cloud. What we are now realizing is that given the breadth of our portfolio, not only have we built a lot of the infrastructure as a services layer beyond the storage compute services, we've built DR, we have built backup services, we have built additional storage services. But now we are going above the stack, about the infrastructure layer to also platform services. So we now have a complete cloud platform. The way I see us now evolving and positioning from HCI to a cloud platform is because of all these products that we've developed around our core offer in the HCI, as you said. So let's look at IS offering, right? That's where you have our infrastructure as a service with core HCI offering. In addition to that, we offer DR as a service. Customers can create DR environments on-premises or in public cloud. We offer storage consolidation, a unified storage. So with our files and object offering surrounding our core platform, customers can now manage any kind of data. It doesn't have to be just structured, it's unstructured data as well. Go above that, what workloads can you run? And is it computing with VDI? We talked about it. We have a number of VDI as a service offerings with partners as well, our GSI partners. And of course, we have our own desktop as a service offering. Database, let's talk about that workload. Of course, you can deploy databases on Nutanix core HCI, and you can manage them using Era, which is, as we said, a very successful product, but we also have partners who are now building solutions and offering database as a service with Era. And if you look at the entire platform, you can run all of this either on-premises or in a public cloud or on a managed service provider estate. So you see, we've really evolved from being a core infrastructure offering to now becoming a cloud platform offering over time, and that's where we are heading to as a company.

And as you continue that hybrid cloud journey and multi-cloud journey concurrent with that, some of the feedback I get from, candidly VMware salespeople, right, is one of the challenges they're increasingly seeing is, how to make that a consumption-based model concurrent with a cloud model, right? So as customers want to consume more of their infrastructure on a consumption. So maybe you can talk to some of the partnerships you've done on that front as well as what you're doing direct to help enable that.

Sure. I mean, absolutely. Look, one size doesn't fit all, so we understand customers want to consume solutions in many different ways, and we offer a variety of consumption models to our customers. One of the things we are very proud of, for example, is you can take the core HCI offering on-prem today with the same exact license, and you can use that in a public cloud. For example, on an Amazon, without having to change the way you license that. So we are truly offering of bringing your own license consumption model there. So that's one. Secondly, if customers want to consume directly are core HCI and AWS in a pay as you go model, we offer that as well. And this is, like I said, with our clusters offering on AWS. Thirdly, we have direct cloud services, like Frame, being Frame is our desktop as a service offering. Beam is our cloud cost monitoring and governance offering. We have DR as a service. All those are purely subscription-based, cloud pay-as-you-go model that customers can consume with. And last but not least, as I mentioned earlier, we have many partner solutions, specifically with GSIs that are also offering consumption subscription-based services, which include the Nutanix software, with the hardware of choice and the services and the managed service that the GSI provides. And by the way, Frame, for example, is also available on Google Cloud, again, as a consumption service for customers. So a variety of different models. One size doesn't fit all, and we are going to continue to offer what the customers need in terms of the different models of consumption.

And Duston, if I remember correctly, we haven't gotten a ton of breakout yet as it relates to a subscription license versus a subscription service or the SaaS consumption offerings. Is that something we can look maybe towards June 22 to get more detail? Or does it take a little more time to get that level of granularity?

It's probably going to take a little bit more time, Brad, because, again, that's just not that big of a piece of the business today. At some point, we'll do that at the appropriate time, but we have so much other information to share at Investor Day that, that kind of took a side seat, quite honestly. So there's a lot of the good stuff to cover.

And maybe since we're talking financials, before we go back to Monica, obviously, you've been talking for a while very consistently about growing the renewal base and the optionality that, that affords you. So maybe for people newer to the story, you can walk through why that's so important, both from a revenue growth standpoint and an operational efficiency standpoint and how that sort of layers in over the next couple of years.

Yes. So this will be obviously a big topic at Investor Day, and you're right. We've been talking about this for several years. And for one reason or another, we haven't been in front of the investment community for over 2 years, whether it's COVID or CEO transition, things like that, and it's been pretty much a qualitative story without any numbers. So finally, at Investor Day, we'll shed some quantitative aspects to this. But yes, the renewals -- we spent the last, effectively, 3 years going through this subscription phase. Now we're up to about almost 90% of business, is a term-based transaction now. But it's been 3 years of investment, and there hasn't been a whole lot of return yet on this subscription transition. And as you know, it's happened, terms have come down as we've expected. Revenue growth has compressed. Free cash flow and usage went up. Operating losses went up. All kind of as expected, but that's kind of the investment phase. And what you're talking about is kind of the return on the subscription base. So what's going to happen here, because we do terms of roughly 3 to 3.5 years is that we know as we get into '22, we start to see a little bit of, more subscription renewals start to flow into the business. And then clearly, in '23 and beyond, you start getting the 3-year tranches and then you start getting the 5-year tranches. So that's -- that wave has -- will start building up over time there. Now, why is it important to the business model is, today, again, if you think about it and you look back, the business has been built effectively on new and upsell business since inception, effectively. And in that, business is obviously, is costly to transact, and it's not as predictable as renewals. And once you get the renewals flowing in, you have what should be a much more efficient transaction, and it should be a much more predictable piece of business. So now we start shifting new and upsell mix, which is high cost, higher risk, to more and more renewals, which is lower cost, lower risk. And then ultimately, what happens is, you start to get go-to-market, sales and marketing leverage because of that mix shift over time. So that's what we're excited about. That's some of the story that we'll talk about on the 22nd.

That's great. And Duston, if you think high level, are there companies out there that you sort of benchmark yourself against as you look forward? I know your unique story with, as you mentioned, many moving parts. But are there anyone out there that you look towards to help drive the future?

Well, I mean, there's a lot of similarities, but nothing's the same, really. So we kind of look at what's an at-scale subscription SaaS company look like and what does their efficiencies look like. And then today, why we're disadvantaged, if you will, from those operating models that you'd expect from a, say, a mature at-scale SaaS company is, is it's the renewal mix again, because you get out into a mature company, and the substantial part of their billings are renewals because of the compounding nature of renewals. And why is that, it's that most of those folks started day 1 with their business model. We started the subscription transition at a, well over $1 billion of revenue with 3 to 3.5-year turn. So it just takes a while for us to start seeing that efficiency over time, but that will happen.

Got it. Got it. Monica, switching back to you. As we think about the go-to-market, obviously, you laid out several different products. For the most part, are those bought by the same person inside of the -- inside of your customer base?

Not -- no. In fact, that's the beauty of our go-to-market now that we're expanding not only the workloads and the use cases that we can bring to life through Nutanix cloud platform, but also the reach of the personas that we are talking to. So one of the things I kind of briefly touched on but I want to reiterate is, our go-to-market and our overall strategy is focused on hybrid multi-cloud. It's really, if you hear our CEO, Rajiv, talk about our vision, our vision is to make clouds invisible by abstracting that complexity away from the underlying cloud infrastructure, so our customers can effectively run any app in any cloud of their choice at any time they want to. And the way we are doing this is, really by offering this complete cloud platform that I described earlier. Our vision is to be able to have customers run any workloads, as I said. And if you talk about workloads, database workload, the person has a different than a desktop versus pure infrastructure for maybe building private clouds or hybrid clouds. So for example, we are not only talking to our traditional infrastructure IT teams, we're also expanding our reach to cloud architects team. So cloud teams, database admin teams, desktop admin teams, for example. So definitely, we are reaching out to a lot more personas. And then as we move up the stack, our messaging is also relevant to the B-level infrastructure, C-level audiences to show them how Nutanix can effectively be the platform to lift and shift their apps without having to refactor them, literally reducing the risk of migration and making it really, really low for customers.

Got it. Got it. So I have a question from the audience, somewhat around Nutanix clusters on AWS and clients doing a compare and contrast with -- when VMware Cloud or VMC on AWS first rolled out. It took a few years to sort of get some level of critical mass. Do you think you can get there faster because of where the cloud is today versus where it was when VMware started?

Well, I don't want to compare to just per se VMware, I can tell you what we are seeing. Definitely, it does take a little while for new products to get some kind of a momentum. But that said, I'll tell you what we're seeing early. We are, what, 8 months into [ NAVG ] or something like that. We already have a few thousand test drive and trials around our product. We are seeing a lot of conversations happening in our sales organization with existing customers and prospects. I can tell you that clusters is a big part of a hybrid cloud, is a big part of our conversations, even as they are talking to new organizations who have never been our customers before. And one of the reasons that's exciting customers who look at our technology is because we offer -- bring your own license and the same license that they can deploy on-premises and in the cloud, so they don't really have to upfront decide what portion of the license they're going to put in an AWS versus on-prem. That's exciting and interesting to a lot of customers because it gives them the freedom and the flexibility of where and when they'll deploy. So without giving you numbers and how long it's going to take, I can tell you we are seeing a lot of early interest, a lot of momentum around our clusters offering. And this is only the beginning for us.

And one quick follow-up on the BYOL strategy. Do you get a sense of where people are deploying? Or once they've bought the license, it's difficult to know?

Well, we do -- we can track it, because at the end of the day, when they use our cloud control plane, right, we can know -- we can track the consumption. A couple of major use cases are coming out, one is DR. So a lot of our conversations and in fact, the early win story -- wins that we've had around the DR in the cloud use case. So in fact, many of our customers who bought clusters, who have licensed clusters, are taking their VDI workloads and creating a DR environment for business continuity in the cloud with that. That's one of the big use cases. DR in general is another big use cases. We are beginning to see some customers look at a lot of lifting and shifting some of their business-critical applications without having to refactor it. So it's really very easy, lift and shift for them because it's the same underlying infrastructure software that the app is running on. So nothing really needs to change. There is some networking, of course, that needs to be worked out in AWS versus on-prem, and that's pretty much it.

Great, great. Excellent. Duston, financial results over the last couple of quarters have been very strong, far ahead of your expectations. So congratulations on that. And I know recent commentary sort of points to, hopefully, a continuation of the trend. Is there any sense of how much of it's net new digital transformation driven versus maybe some hangover, and hangover is the wrong word, but some push out from 2020 because of COVID?

Yes. I don't think the pushout from 2020 is substantial, quite honestly, in those results. I mean, occasionally, I still see some "loss notes" even now that says we're going to pause and we're readdressing things as far as from an economic perspective. So I think there's puts and takes there. There's clearly some that, okay, we're ready now, let's have another discussion. And there's still some hesitancy here and there. So I don't think the quote, you terminalized the hangover from 2020, I don't think that's really been a real big piece of the equation. A write-off about a year ago when, clearly when the pandemic kind of first started, as you know, we saw as expected a bump up in the VDI-type business, and that got up to 27% or 20%, I forget what it was, 27%, 28% of the business, which usually hovers in the 18% to 22% of bookings. And now it's back to that kind of 18%, 22% range. So there's nothing elevated there. So I don't think there's a whole lot of -- finally, the people are ready and it's a big push. Now hopefully, we'll see some of that. I'd say we've seen some, but occasionally, we'll still see it going the other way, too.

And I know you've sort of talked to this a little bit, but just to drive it home. I mean we're hearing more and more out in the field that larger projects, especially for on-prem or self-managed data centers are percolating back up, right? Would that be consistent with what you're seeing out there as well?

Yes. I mean we've always got a fair amount of large deal activity going on. And sometimes, it's obviously, our Q2 and Q4s are obviously a little stronger for various reasons. But yes, there's never any shortage of big deals, really. It's just the timing and how those play out and things like that, but I think, just the willingness now to have those discussions of maybe a little bit more and then the continued maturity of our overall product portfolio. It just really starts to sync up together with both those things. So yes, hopefully, we'll continue to see some stuff here in Q4. We'll see how it plays out. Q3, as you said, was a good quarter. We had some big deals in Q2. So as I said, the pipeline, we talked about the pipeline during the earnings, that was strong. So yes, I think there's a lot of activity going on. Now it's just, when does it close?

Great. Monica, on the partnership front, if my words, not yours, and correct me if I'm off, but it feels like HP and Lenovo are probably the 2 leading partnerships now for you guys. Do those bring different advantages or skill sets to the table, one versus the other?

So definitely, HP, Lenovo are big partners, we also have hyperscaler partners. We have ISPs, channel partners and global SIs, as I said. On HPE, we are really proud of the partnership. It's grown steadily over the last 2 years with a significant number of joint customers that were overall geographies and segments, including many Fortune 2000 enterprises. And I don't know if you heard these numbers before, but I'll rattle them off, our bookings with HP grew nearly 80% year-over-year during the first calendar quarter this year, and we are in the process of actually working on some new workloads and new solutions available on relake with them as well. And then as Duston mentioned with Lenovo, we just announced a very relevant and timely solution for hosted desktops with Nutanix with Lenovo TruScale. So both those partnerships are definitely very important to us, and they both give us access to a large number of prospect, prospect base and also together, we can deliver joint solutions to customers that are looking for that. In addition, we also do continue to partner with Dell EMC to serve numerous joint customers. So on the OEM side, I would say, HP, Lenovo and then, of course, we still have a business with Dell EMC quite significantly to service our customers. I can comment on the hyperscaler partners as well. I mean as you know, clusters, we announced with AWS, but we have many other as-a-service offerings that run on hyperscalers. So for example, desktop-as-a-service with Frame on Google Cloud. We have Calm SaaS across multiple clouds. Calm is our application automation orchestration solution. We have Nutanix Beam, as I mentioned earlier, which is a cloud cost governance solution, which is also available across multiple clouds. And there's a lot more work being done with Azure. As you probably remember, we announced our partnership with Azure a few months ago, and we are working with them on bringing clusters to market. In the meantime, Azure Arc and Nutanix, we've partnered on Carbon, our Kubernetes technology. And Azure actively supports Nutanix running Nutanix Kubernetes with carbon. We are also working on more advancements with Azure Arc as well.

Got it. Just -- Duston, it might be a little bit in the weeds, but for these relationships where an HP or a Lenovo was selling your product, or reselling your product as a service as part of a broader solution. Are you selling them a term license and they get to deploy that? Is it rev rec on an as-used basis? How does that work?

Yes. So it's a little different. Cash, as you might expect, is more on a pay-as-you-go type thing to us. And the rev rec, it depends, but it's not -- I don't believe it's totally different than our regular rev rec policies.

Got it. Okay. And then Monica, maybe wrapping up as we're sort of getting to the end here. Dell EMC, is there the potential once they've spun out VMware that, that relationship could change to the benefit of Nutanix?

There is always a potential. We never say never. For us, it's about the ecosystem. As you know, Nutanix has been one of the big design principle of Nutanix as a product portfolio and as a company has been always freedom of choice for our customers. And ecosystem is extremely, extremely important for that. We work better together with our partners. So absolutely, anything is possible in the future.

Got it. And then last question, I promise, one from the audience around Era. Basically to the effect of it's an extraordinarily, uniquely positioned product in the market, very -- stands above the competition broadly. That being said, who do you see in those deals, if anyone?

Actually, that's a great question. And by the way, I come from a deep database background. I spent 22 years at Oracle and 4 years at Informix. And I love Era. It's so unique in the market. What Era is doing, this whole multi-database, multi-cloud management and almost giving customers the ability to create database-as-a-service solution with multiple databases, advanced, whether it's on-premises or in the cloud, it's a very unique functionality. I don't see anybody else in the same exact space at all at this point. And that's why, as I explained earlier, we started as an IAS company, but we're rapidly moving up the stack to become a platform company, and that's where I put Era, squarely there. It's a platform-as-a-service solution that we offer for database operations and automation and database-as-a-service.

Awesome. Well, we're just about out of time. I don't know if you have any final thoughts. If not, thank you so much for the time today.

Okay. Yes, well, good and look forward to hopefully seeing a lot of you folks at the Investor Day on -- virtually, obviously, on June 22. So we look forward to that.

You all have a great day.

Okay. Thanks, Brad.

Thank you so much.

You too, Brad.