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

Good morning, and welcome to the Deutsche Bank's Technology Conference. Today, we're excited to speak with Rajiv Ramaswami and Duston Williams, respectively CEO and CFO of Nutanix. My name is James Hopkins. I'm the Vice President on the Software Investment Banking team. Just quickly, Rajiv joined Nutanix in December of 2020 from VMware, where he served as the Chief Operating Officer of Products and Cloud Services. And I was impressed to learn that he holds 36 patents. Duston, the CFO, he led Nutanix through a successful 2017 IPO and prior to that also led Gigamon through its IPO as CFO and has a wealth of public company experience. So as a reminder, if you have questions for Rajiv or Duston throughout this discussion, you can submit them through the chat box. And with that, let's get started.

So maybe either one of you, a question just in general, if you could, for those who are a little less familiar with Nutanix, provide a bit of an overview of the company, kind of where it used to be, where it's going. As you created a hyperconverged infrastructure market and are the clear leader, it might be helpful to provide some color on kind of what hyperconverged infrastructure is and its sort of the core value proposition there.

Indeed, the -- first of all, glad to be here with you all today. Now Nutanix started out, as you said, as a pioneer of hyperconverged. Now if you look at data centers, I mean, our fundamental core value proposition was around busting the different silos within these data center teams. So it used to be that compute, storage and also networking resources were all managed separately, purchased separately, deployed and operated separately. And that led to inefficient utilization. It led to multiple teams working on things. And what we did with hyperconverged was brought all of those silos together, right? You could say we almost busted those silos, brought them together into a single, simple platform where you can manage all these resources together in a software-defined way using software, making ultimately this much, much more efficient for customers, much, much more efficient for data centers, both in terms of CapEx and OpEx. So total cost of ownership reduction significantly. So that is the first innings, call it, of HCI, and that's what's gotten us here today. We pioneered the market. We are a market leader here, and that's the first innings of HCI. Now where we're going is using that same platform that we've built as a platform that customers can use not only inside their data centers, but also in the public cloud of their choice. So the next inning really is if you look at what the new silos are today, it's the clouds. So people are running -- companies are running workloads everywhere. And every cloud is different. So you have effectively every cloud being a different silo. And what we are aiming to do here is using our platform provide a single platform that companies can use across any cloud of their choice to run the workloads in a consistent way. So bringing the same simplicity and ease of use to the cloud.

Got it. And kind of -- maybe as a follow-up on that, Rajiv. If you could talk a little bit about Nutanix Clusters and I think hybrid multi-cloud, as you're kind of alluding to, has emerged as this holy grail enterprise infrastructure enabling flexibility, accessibility, compliance, reliability, all these things. How does clusters help the enterprise make this reality? And how does kind of your company's philosophy of interoperability and platform agnosticism fit this philosophy of multi-cloud?

Yes. I mean, fundamentally, as we said, companies are going to be operating in this multi-cloud world. They're going to figure out for every application or workload which cloud they want to run it on. And most companies live in that world and will operate in that world. Now with clusters, what we do is we provide a platform, and it's exactly the same software as our other software, right? It's the same one software stack that can be deployed not only inside the data centers, but it can be deployed today on bare metal in AWS. And soon, it can also be deployed in bare metal on Azure. And the notion, therefore, is customers can seamlessly shift workloads, right, to the public cloud and back without having to refactor applications. Some of the initial use cases of clusters are around, for example, disaster recovery. So you have some of your workloads running in your main data centers, but the disaster recovery for that sits in the public cloud, or you might want to lift and shift and consolidate data centers and move those to the public cloud. So clusters provides an easy way of doing that. And like with everything else, it's really simple, right? It's simple in the sense that it's the same software, same license, a complete portability of license. You can deploy it wherever you want. And so we think this is going to be quite an interesting and easy way for customers to embrace public cloud at -- for the use cases that fits their needs.

Got it. And you were kind of alluding to the flexibility element there. Maybe a question for Duston. You've been on this journey towards becoming a subscription company and made tremendous progress. What have you kind of learned in that process? And what surprised you? And, I guess, 2 questions, maybe one on the financial side, just what does the picture look like now versus before, Duston? And then maybe, Rajiv, how does this shape the sort of product pipeline or the trajectory of product development, if at all?

Yes. I'll take the first part on the financial piece there. Obviously, we've come out of this, which we have been talking about for a couple of years. Now we've come out of this kind of getting to the end of the messiness here and coming out with a whole different business model, a completely different business model. And that's what we've been working so hard over the last actually 3 years now is this transition. And finally, we get to the point that the benefits start to happen with our business model and the renewals start flowing and the low cost of those renewals and how that gets leveraged. And there's also a win for customers in this, too, because it's more -- we've always been about choice and optionality. This adds more choice, more optionality. So it's a win for the customer. I think it's a win for our business model. And quite honestly, I think it's ultimately a win for our sales reps also because now they're on ACV. They have more choice how to make quota and more optionality there. So it's clearly, I think, a win for everybody. It's taken a while to flush through things, but we're starting to see the benefits there. And then your question is, what have we learned? It's a lot of hard work. And it requires, I think, a lot of patience, and it's been a little messy. And I think now things are starting to pay off. I think the one thing that I personally wish I would have done differently when we went to ACV billings guidance at the beginning of FY '21, because of the volatility in the terms and it's hard to predict revenues because of the term compression, but ACV billings was obviously a nonvolatile metric from a term perspective. I wish we had done that focus and had investors focus on it probably a year earlier. I think it would have helped a little bit with the messiness from that perspective. But regardless of that, I think when we've come out of this in, I think, pretty good shape and really excited for the future how this is now, not only lined up from a business model, but now the products start laying into this. And it's a great, I think, foundation.

So to the other part of the question, James, how has it shaped what we do differently. First of all, from the beginning, we've always had a focus on simplicity and customer delight. Products are simple to use, simple to get going. It doesn't require a lot of training and enablement to the investment on the customer side. The second is that our customer, our NPS, customer NPS, Net Promoter Score, has been 90-plus even as we've scaled the company to 20,000-plus customers. Customers like doing business with us. They generally like the support that we provide them. Now both of those are critically important in a subscription world, even more so than in a perpetual license world. Why? Because it's all -- you got to focus on not just selling, but you've got to focus on adoption and consumption because that's what leads to renewals. So that -- those core philosophies inside the team, all the way, every employee, right, is focused on simplicity and delighting customers. That bodes well as we now look at capitalizing on the renewals that are starting to come in now with our subscription transformation and making sure our customers are adopting. So fundamentally, I think those virtues will continue. And then, of course, over time, we'll also start delivering more and more of our offering as a service versus just providing turnkey software.

Got it. And congrats on the tremendous progress or the transition overall. Really, really impressive and great to see. I guess following up on that point, and you mentioned sort of like maybe a question for Duston, the ability for salespeople to have more flexibility in their targets and their efforts. Can you talk a little bit about the go to market, obviously, sales efficiency, as you mentioned, retention renewals is a focus. How are you driving efficiency here? Are there any key partnerships you'd highlight to investors? Any updates there?

Maybe, Rajiv, do you want to talk about the partnership piece there?

Yes. I can start with the partnerships. And then, Duston, you can talk about the overall efficiency. First of all, I think on the partnerships, I mean fundamentally, first, let's start with the broader picture of sales efficiency and productivity. The way we get there is through multiple elements. First off is one of the -- we are, of course, we have, from a sales perspective, we've got now people who are focused on new business, and then we've got a customer success team focused on renewals. That's much more lower cost and can be done at scale. Second, we are actually creating solutions with our products. We are instead of selling standalone products, we are now selling solutions, which help upsell, right? We sell more of our portfolio that way. It's also easier for customers to consume, right? And we're also simplifying the pricing and packaging for all of these going forward. The third is, we're also not just playing alone in the market. We are working together with partners and going to market together with them. And there's a number of partnerships that are quite meaningful and also help our customers. They'll get a complete solution from best-of-breed providers. And I would group those partnerships across -- in 3 areas. One is hardware platform partners, people like HP, for example, Lenovo and others. The second would be our ecosystem partners. And these will be folks like Red Hat, which we just recently announced a partnership. And the third, as we get to the public cloud, are our cloud partnerships with AWS and Azure at this point. So that's the lens of the overall set of partnerships. Now I can talk a little bit about the Red Hat partnership, which is a recent announcement on our part. And so if you look at this as an ecosystem example, Nutanix provides a leading Infrastructure as a service stack based on our HCI platform across -- in a hybrid multi-cloud world. And if you look at customers, they're looking at both running modern [indiscernible] applications and traditional applications. Now for modern [indiscernible] applications, Red Hat provides OpenShift, and they are the leading provider of OpenShift in the enterprise. What we've done with this partnership is bring those two together, Red Hat OpenShift running on top of Nutanix, right, with our Nutanix Hypervisor, AHV, being completely certified as part of the overall solution with a mutually preferred relationship. So we are the preferred HCI solution for Red Hat OpenShift, and Red Hat is the preferred enterprise [indiscernible] solution for us. The benefit to customers is that they can seamlessly deploy, get support for this entire solution across the cloud of their choice.

Thank you. So James, a little bit on the sales productivity, the partnerships that Rajiv just talked about, those all flow in, obviously, one way or another to helping with sales productivity. It's been a big focus. The other thing is just our channel in general that we work with. There's been a lot of efforts as far as what we probably call channel economy and having the channel actually doing a lot of the selling without much of our involvement. And so that's been a big effort. A lot of things have changed in the back office to allow for that. So we've seen some progress there. Clearly, our emerging products have done really well for us. That's a whole another piece of the business there that opens up more opportunities, bigger deals, more upsell from a productivity perspective. And then just the shift from TCV compensation for the reps to ACV compensation has also helped because now everybody is on the same page and just trying to get the best deal from an ACV perspective rather than a TCV perspective and more discounting and things like that. So there's lots of things going there. And then just plain execution and back-office work and discipline and processes and things like that. And we've seen some pretty good results from a productivity improvement.

Great. Well, congrats on that momentum. We've got a question from the audience if you're -- a couple, if you're open to a couple of audience questions?

Sure.

Sure.

So one is just within hyperconverged, if you could talk a little bit about the competitive situation with VMware. And just kind of I think, Rajiv, you had mentioned some momentum in terms of an increase in the win rate versus your largest competitor. Any update on that, kind of how your -- how the head-to-head is looking?

Well, look, I mean, we've been focused on what makes us good with our customers, right, and what we can do to provide value. And we are very focused on it, right? This is the one thing we do, and we are best-of-breed. Now when you look at the value proposition in terms of how we're winning, right, the first I would say is that the core value proposition around the simplicity of choice -- simplicity of the offering the choice, right? We provide choice in terms of choice of hardware, choice of hypervisor, choice in our public cloud and choice of contract durations, right, with our subscription offering. So lots of flexibility for our customers. Our customer delight, right, our NPS score being where it is, customers like to do business with us. And then our roots as a data company, right? We manage data. We store data of all forms. So we have a complete offering when it comes to data, right? So storing blocks, files, objects, analytics on data, adding security protections like ransomware built in now into some of our products. So that's a full picture, right? And that's the competitive differentiator. The second is the focus we have on the go-to-market, right? Our sales team is very focused. Our execution has continued to improve over the last several quarters. Our pipeline quality has continued to improve. So all of this is resulting in an increase in our win rates.

Got it. Yes, you mentioned data, obviously, and analytics. I'm curious if you could maybe just expand on kind of how AI fits into the Nutanix story in analytics? And what is AI-defined infrastructure conceptually and kind of what are the benefits of that?

Yes. So there are really -- it's a 2-part question there, James, because we look at it from 2 angles. So the first angle is our customers are now running a lot more machine-learning AI workloads as they go digital, as they look at their workloads and their own data and looking at it. So we want to be a platform that can run all those workloads. So as part of our mission is to take our core platform, HCI platform, and make it really good for all workloads. And that's been an increasing trend. We started out with virtual desktops as the initial workload. That's only 20%, 25% of our business today. But the rest of it is not mission-critical workloads and things like analytical workloads and AI workloads that are starting to land on the platform. And so focusing on what it takes to run those workloads very efficiently, whether, for example, supporting GPUs, which many of these AI/ML applications use. So that's the first leg of what we do. Now the second leg is to your question around AI-powered operations. And what we do with this is essentially look at the data that we manage, right? We look at the infrastructure that we manage. And we look at how we can continuously optimize that infrastructure, start doing predictive analytics and understand potential failure modes. We do collect telemetry data from our customers. We have an offering called Insights. And using that, we can -- and with the back-end AI engine, and ML engine behind it, we can start looking at the expense and start providing notifications to customers. So that's the second leg, right, which is how do we use and embed AI-powered operations inside of our products to help but -- make it easier for customers to run their infrastructure.

Got it. That's -- it's very exciting to hear. Maybe a question for Duston regarding the Bain strategic investment. Can you talk a little bit about that partnership? What that's kind of brought in terms of the capital infusion and just maybe an update there?

Yes. So that -- we did a little over a year ago now, raised that money. And at the time we raised that, it was -- we were coming through transition and, ultimately, a CEO transition with Rajiv. And it gave, I think, a big vote of confidence of what we were doing internally from a business model perspective. Obviously, they did a ton of due diligence. And then they kind of saw what we saw and what's happening now. So it's a great partnership. Love their great addition that we have 2 Board members. They're very active in the company, helped out a lot, especially within the sales piece of the equation. A lot of things going on in the back office, a lot of input, helpful input from that perspective. They see a lot of different companies, obviously. So best practices, how other folks have done it. There's lots of pinging them as far as maybe a little advice on some things that we're doing, should we do it differently, better. So that's been a huge help. The raise itself was a huge comfort as we were getting through this transition with some volatility in terms and not quite knowing how much cash exactly we would use. So overall, it's been, I think, a great partnership. And obviously, we appreciate their confidence in the company and the partnership and them helping out over the last year or so.

Great. Great to hear. Yes. I was wondering, you had mentioned, I think, on a recent -- on your last earnings call just about a few big wins, one of which was a large European government ministry. Maybe if you could just talk a little bit about momentum in the government vertical and kind of where you see opportunities for growth in terms of verticals specifically.

Yes. James, in terms of these verticals, government and federal, the public sector has always been a significant vertical for us. It's been important for a long time here. And in fact, this quarter, by the way, the end of the year for the U.S. So traditionally, it ends up being a big quarter for our public sector business in the U.S. Now as we look at the business there itself, there, again, I think we're well embedded across a number of agencies, a number of -- both in the civilian and as well as defense areas. We are also focused on helping those customers migrate to the public cloud. So we recently, for example, with our AWS offering, we did get certification on the AWS GovCloud, which will also help us land cloud workloads from these agencies. In terms of the other verticals for us, financial services is a big vertical. Health care is a big vertical. But at the end of the day, broadly, we are very horizontally focused, really, in the sense that the platforms that we build and deliver apply to all verticals and to help our customers run their applications fundamentally in a modern infrastructure. So it's pretty broad-based.

Got it. And then in terms of the sort of international opportunity, go-to-market, are there any kind of regions you're looking at strategically or you're trying to increase footprint momentum? Or what's the output?

Yes. And I think we've got a fairly balanced business, but we see lots of opportunities internationally. We continue to expand internationally. We've got presence all around the world today. Just some areas that we've seen good traction for us. Middle East has been a strong area for us. And the teams there have been performing really, really well over the last several quarters. But in broad-based presence and some of the same trends, again, we are seeing across the world, right? Same trends towards modernizing infrastructure, running a whole set of new kinds of workloads, migrating to the cloud, enabling remote and distributed work or hybrid work. I mean, these are trends that are, again, we're seeing that with customers all around the world. And those are the trends that we are focused on helping.

Great. We've got another audience question, investor question just about -- just looking for some color on Azure and Microsoft 365 and kind of how the Nutanix virtual desktop business fits in that picture and kind of what that's looking like.

Yes. I mean, just to provide context, our virtual desktop business is about providing the platform on top of which you can host virtual desktops. So in a lot of cases, customers, for example, will use Citrix, right, are running on top of Nutanix. And these are going to be both on-prem and also cloud-delivered, right? So you're going to have both kinds. And we are -- we support both, right? I mean, if somebody wants to use, for example, our cluster solution and deliver virtual desktops from there. And we're starting to see those kinds of use cases now, right, especially when it comes to disaster recovery. So you might be running and hosting your virtual desktops on-prem, but in the case of a disaster, right, you can actually shift and get all of those spun up in the cloud and delivered from the cloud. And it's very cost-effective because you're paying for compute capacity when you need to. Now that said, now the market, of course, if you look at the overall virtual desktop market, it is true that desktop delivered as a service is continuing to -- it's small right now, but it's continuing to grow, right? And when we look at some of the work that we do with the other -- such as Citrix and others, we are enabling that also to be delivered on our platform.

Got it. Got it. Yes. So it's kind of consistent with this trend of interoperability and just allowing flexibility for customers. Yes. I think maybe, Duston, for you, just generally, if you want to comment on kind of what this next year looks like in terms of goals and kind of further in the transition to subscription? And maybe just talk about kind of what the next 12 months or a few quarters are looking like?

Yes. So we laid out a pretty good view during the Investor Day back in June, a pretty comprehensive look both on the business side, product side, go-to-market side and also the financial side of the equation. And we hadn't been able, for various reasons, to really do the financial piece of what we've been talking about. So we finally got a chance to really quantify the strength of the business model going forward and things like that. So it's a continued evolution of that transition. And we start now -- '22 is kind of, from a renewal perspective, a little bit of a tweener period. We have some [ life of ] device support weaning off. And now we're starting to see, especially at the back end of FY '22, the ATR is available to renew, the subscription renewals start to flow in. And so that gets exciting, and then that flows into '23, obviously. And then the renewals, the business mix starts to shift a fair amount to renewals. We'll still focus, obviously, heavily on new logos. You can't have a renewal unless you have a new logo, ultimately. So we'll continue to focus heavily on that, the upsell. But the renewals start to flow in, those come at a lower cost, leverage starts to happen. In the interim, we're focusing just on expenses themselves, forget about the leverage from the renewals. But you've seen in FY '21, expenses came to a halt. FY '22, in general, we're still going to fund a lot of R&D efforts, a lot of go-to-market efforts, but there'll be a very small overall aggregate increase. And I think the exciting thing also is, with Rajiv coming on board, we've been very disciplined, very thoughtful on top line, but bottom line, too. And so on the expense side of the equation, we've got a plan in place there. I think the exciting thing is we -- if we're fortunate enough to have top line outperformance, we'll see how FY '22 goes, but if we're fortunate to have outline -- top line outperformance in '22, a lot of that is highly leveraged to the bottom line because we're not going to throw large chunks of expenses into the equation just because if we're fortunate enough to increase the top line. So I think that's kind of an exciting part of the model. And then you start getting leverage from the renewals, and it kind of all comes into place.

So maybe just to sort of give you a little bit more of an up-level summary on this. At the Investor Day, as Duston pointed out, we laid out our priorities. We talked about a solution -- product solution portfolio, how we're going to get leverage through partnerships, completing our journey to the subscription transformation, building on our talent, and the financial model that Duston talked about, where we said through FY '25, we will grow our top line ACV at 25%. And we will reach free cash flow positivity by the end of next calendar year. And so what we're focused on this year very much is just simply executing on those and continuing to deliver and make progress towards those goals that we outlined.

Got it. Well, congrats on the execution, the momentum. And it sounds like an opportunity for a lot of increased operating leverage in the model going forward in '22. Well, thank you both a lot for your time today, Rajiv, Duston. It's been great to talk to you and really interesting to get the update on the story of the business. I think we've got a couple more minutes if there are any more audience questions. I don't see any at this time. But otherwise, if you guys have any parting words or we can give you back a couple of minutes of your time. I know you're both busy.

Yes. I -- like I said, I think for us, the -- we are well along -- I mean, we're well positioned as a company in terms of doing what our customers need as they modernize their infrastructure and go to the public cloud and handle remote work or distributed work. Our execution focus has sharpened over the last several quarters. We've laid out a long -- midterm, what we call a financial model. And this year, we continue to execute on this journey for us. And I think we're looking forward to continuing to deliver on the results like we did this quarter.

Great. Well, thank you, and congratulations on that.

Thank you.

All right. Well, thanks, both again for joining. Have a great rest of your day, and look forward to following Nutanix as we continue on this journey.

Thank you, James.

Thank you.

All right.