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

Happy Monday, everyone. Jim Fish here. I'm with the infrastructure and communications software team here at Piper Sandler, where I'm joined by Quinton Gabrielli on my team as well. Hope you're enjoying our virtual event so far, but welcome to the discussion with Nutanix. Joining us from Nutanix are CFO, Duston Williams; Thomas Cornely, the SVP of Product Portfolio Management; and of course, Rich Valera, VP of IR, is also on the line here. So guys, welcome, and thanks for joining us.

Great. Pleasure to be here. Yes.

So Duston, the big question we're getting following the quarter is really about sustainability after really some impressive numbers. You outlined some objectives like growing ACV billings above 25% through fiscal '25 and duration kind of stabilizing somewhere around 3, meaning really like total billings will converge to that rate year over time. What are the biggest factors that are going to result in Nutanix creating this 25% sustainable growth over the next 4 years?

Yes. I think, Jim, if you step back and look at it a bit here, I think it's set up quite nicely for us over the next several years here. And you start at a very high level. The market is big and it's growing. So that's the kind of the first backdrop, which is a great environment to be in. And then if you really step back again is that there's really, truly when you look at our full capabilities from a platform perspective, there's really only a few companies that can really do what we're doing in this market. VMware, obviously, is sitting there, Red Hat, maybe one other or so. But you've got really truly a limited set of companies that really have our full product capabilities. The market is big. I think the other product, and Thomas can allude to this here, the product continues to get obviously stronger. It's doing quite well now, but it will continue to get stronger. Thomas and crew have been working on a lot of this solution selling, which is going to not only make it easier for our customers to consume our products, but it's going to make it easier for our sales reps to sell the products, so that's another one. Clearly, renewals are going to play a major role over the next several years, not only on top line acceleration, but also on leverage as we all know. So that's kind of both top and bottom line there. And then you go back into the back office a little bit, the execution continues to do really well. That improves really every day, the discipline, the structure that's going on. And I think if you step back and you look at all these, it's really a nice setup for the next several years that we feel comfortable with this 25% ACV growth over an extended period of time. And then you look at who's going to take most of that growth and you look at how derisked it is, and the renewals, we had pegged in at roughly a 50% CAGR through this period over the next 4 years and 80 -- 70%, 80% of that in the next couple of years is already sold, just waiting to renew. And then 3 years out, about 60% to 70% of what we have in the plan is already sold, waiting to renew. And then we have the new and upsell business growing at about 15% over that period. So we think it's set up quite nice for us to continue to do well in this environment and grow that 25%.

Yes. And then one of the big things out of -- actually right before the quarter was that announcement with Red Hat in terms of partnership right there at the quarter end. First, maybe this is more for Thomas or maybe you, Duston, but just to level set this for those who are newer to this story, generally, how has your channel relationships, including those with tech partners and OEMs, really evolved over the last year? And how does that Red Hat relationship exactly work?

Are you going to take that, Thomas?

Sure. Sure. I can take that one, Duston. I think there's -- if you think of the last, I'd say, 18 months, a couple of years, right, there's a shift right in our strategy, right, which is really around thinking more in terms of platform, right, and what we refer to jointly as meeting with friends, right, which is working more closely with partners and finding ways within that are truly win-win in terms of how we can go and basically attack the market and help customers. So we've talked quite a bit about deepening the relationship with HPE and Lenovo, basically giving customers more options in terms of how to consume our cloud platform on top of their hardware and their own hardware to service-type offerings, right, things like HPE GreenLake, bringing our own solutions around Delivery as a Service on top of GreenLake and making that available for customers in a consumption-based model for the whole stack and similarly, with Lenovo, right, and our trusted offering, doing the same thing on the VDI and EUC side of the equation. So those are more around partnering to go and give customers more options in terms of how to consume. The Red Hat partnership is a bit different here, where you can see it's really about bringing 2 leaders in the market when it comes to hybrid cloud and combining our technologies, right, to give a better solution for customers in terms of deploying and modernizing applications, going cloud-native stack quite effectively on-premises. But then the whole idea here is simplifying the whole stack from initially the hardware and the infrastructure, all the way up to the [ Karbon ] Platform Services that you can get from Red Hat, right? And this is about adding certifications of the Red Hat portfolio on top of our hypervisor built-in, but also complementing each other here to make it easier for customers to go and stand up the environments and again, adding value both to Red Hat and Red Hat onto the platform wanting deployment, get your client certifications deployed, build them, complement the data services, which is one of our core differentiators here in terms of being able to then provide file services, object services, database services directly from the core platform, right, and again, complementing those applications to make it easier for customers to then build those new apps. It gives developers choice. They can now bring their [ Karbon ] platform of choice on top of Nutanix. It gives IT teams the right infrastructure to then simplify the environment, get something that can simply scale and again, become the foundation for on-prem and hybrid cloud.

Understood. And maybe, for Duston, is there any sense to the overlap of the installed bases at this point between RHEL and OpenShift versus Nutanix? And then, Thomas, as a follow-up, with this relationship now in place and Karbon being a piece of what's been kind of the Nutanix business going forward, it really hasn't been much of a needle-mover yet, is my understanding, but should we think about it as giving customers choice between Karbon and OpenShift? Or that Nutanix reps will generally or gradually shift towards OpenShift to Nutanix together over time? How do we balance that as [ kind of containers ]?

Yes. I mean it's exactly your first point. It's about giving customers choice, right, in the end. We have Karbon. Karbon is in the portfolio. It's good enough for a number of customers. But when we look at the Red Hat partnership, it's about recognizing that OpenShift is the preferred enterprise Kubernetes platform for new customers and many large enterprise customers, which are going to be the ones that we want [ to go to if ever ] with those solutions. So customers get choice. In the end, we're providing the infrastructure platform for this, right? And we can go and make sure that you can bring your [ Kubernetes ] to OpenShift, but you can bring some other [ Kubernetes ] stacks, right? We're working with others like Google Anthos, like Microsoft Azure Arc on top of Nutanix' platform. So it's all about choice for developers while staying true to the core value prop of the platform around simplicity, scalability and reliability.

Duston, any sense to the overlap then?

I don't know if, Thomas, you might probably be better to answer that.

This one, to us, right, it's all about expanding our target markets, right? It's -- Red Hat is obviously present in all enterprise accounts with Red Hat Linux, right? Historically, we've gone after those workloads using ESXi as a hypervisor running on Nutanix. We can now go with a full stack approach using our own built-in hypervisor, AHV, right, to go and cater to do the workloads. So if you think of in other marketing or in one account, before, we could go aggressively with all Windows workloads on top of AHV. Now you basically expand that to all Linux workloads running directly on top of our own hypervisor, right? And just that, within the given account, you double, think of it way more than that, actually, when you're like thinking of [ these kind of ] applications, but now think of this in the broader market around enterprise customers. And so this is really how we think about this partnership. It's truly a win-win for us, right? It's great for Nutanix in terms of going after and supporting more workloads at large customers, right, even for Red Hat because it gives them a simple platform, [ which could be ] a turnkey for customers to go and deploy OpenShift and classic applications and scale them on-prem.

Makes a lot of sense. And Duston, more near-term recent results, fiscal Q4, Nutanix won some really large expansionary 5-year deals with a couple of big customers. With these 2 as examples, perhaps, can you walk us through the typical cadence of cross-selling and upselling into the installed base, what these larger customers were doing between expanding with the core offering versus the emerging products, and how the sales team really tackles these types of deals now that we have a customer success team separated from really that field sales rep that we historically have had with Nutanix?

Yes. And then don't forget, on the customer success piece, I think that you're referencing that kind of building of that group and the separation of the group is really focused on the renewal piece, not the upsell or not the new business, just the true renewal, so term-based subscription. That's what they're attacking with the sales rep. Obviously, ultimately, it's the sales rep at the account responsible, [ and the SA ], for the renewal, but those folks are attacking it just from a renewal perspective. Just on the large deals, the beauty of our product, as you know, Jim, is that the sales teams are in the accounts all day long upselling because that's the beauty of our product, that it's modernizing just what they have for the existing infrastructure, putting more 3-tier over onto our solution, new workloads under our solution, different geographies for the customer, different new cases. So the beauty of it is that, all day long, that upsell occurs and throughout a quarter, upsell occurs. You referenced a couple of the big accounts. If you look at what's happened in -- historically, what's happened in these accounts before, either we have the emerging products or the emerging products were mature enough. Almost always, they would start with the core, as you might expect, get comfortable with the core. And some examples on this, and these are all kind of, I got a few examples that are all in the top 10 for the quarter, 1 large health-related opportunity. This was an analytics app that was running on some IBM equipment that was getting obsolete, put that onto our core as more also a vSAN migration away from vSAN, which was great. Obviously, we don't charge for AHV. And then included in here then was a bunch of Flow, Files, Prism Pro, all the emerging products. We saw a significant uplift in ASP because of the emerging products. This is not an unusual story. Another large banking institution, had been a customer for a while, came in with some Calm and Flow as upsell. That incremented the ASP. Our biggest deal of the quarter put a lot of, as we talked about, a lot of core mission-critical applications on our core. They went big with Era. As you know, that included Calm and Files, again, not unusual. There was a large Fed deal there that was just modernization of their infrastructure that included Files, Flow and Calm. And then a really interesting one, which was a big deal. This was a use case for us to prove the economics over public cloud. And not surprisingly, the economics were overwhelming for them to run their applications on our core that included again both Flow and Era in that environment. And then we had one deal. I know we had others that went the other way, but one of the big deals in the quarter, they were worried about hardware availability. And so they wanted to book something a little earlier. Again, longtime customer, a large, large, old financial institution, so that worked in our favor. But we had others going the other way clearly there. So lots of interesting things, and these become more and more normal, if you will, from potential upsell, again start maybe with the core expanding. But now that the emerging products are getting more and more mature, it's not unusual now for even now new business to include several of these emerging products, so...

That actually gets me directly to my next question, and we've kind of addressed this already, Duston, but I would love to hear Thomas' angle as well. Emerging products' attach rate is up to about 41% on a trailing basis. So I guess what solutions are seeing the best attach rates at this time? I mean, Duston, kind of alludes to, it sounds like, Files, Era and Flow are doing really well. And maybe, Duston, as a follow-up to you, while prices differ across product sets, is there any way to quantify how this can really influence a customer size over time?

Thomas, would you like to start?

Yes, yes. That's a great question. So the way -- I mean one of the ways that -- and on the product side, we think about the emerging products, right, they're about really opening new angles for us to go and establish beachheads into accounts, right? So when you think of Files coming to our core, that's one way to go and have a full solution to then be simpler for EUC- and VDI-type use cases, right? You basically bring the desktops on top of your platform and then you complement with Files. And now for customers who are more security-minded, [ they will go and basically ] add in network security, our Flow offering, into this, right? So as the market's requirements evolve, we can go and basically tack on emerging products to again have a more competitive offering [ eventually ] for customers and then drive more adoption, right? Era is another good example, right? Again, you're going after the different use cases, right, more delivery-centric, more high-performance, [ business workload-type ] environments. But again, because of Era, you basically now have a strong claim for those workloads, right? You can win on -- in those -- against the competition for those workloads. And now you have a proof point of the platform, right? Remote offices, ROBO, edge is another use case for the core platform historically, which is you get all these things in place in a customer And then they get to adopt, they get to experience the systems. They get to see the simplicity. They get to run with our support services. Again, one of the key [ things that win our ] market here is NPS 90, which is one of those core differentiation in terms of whether our customers [ turn to Nutanix ] just for the product, [ into the -- just in terms of ] how we take care of our customers. And from then, you get the right to expand, right? And now you expand, you're going after more private cloud use cases. And this is where Duston talked about Calm coming into a number of large deals. Private cloud is all around automation, across the whole stack, right? And Calm is our core automation engine to go to both Infrastructure as a Service, but then gradually get into Application as a Service for those customers, both on-prem and in public cloud. So you want to think of this as like establishing stepping stones, right? You bring it to accounts, they get to the value, they get to see what Nutanix can actually do for them and they experience it. And then you open the door to go and do a lot more, right, and become truly core for their infrastructure choices going forward. And so that's how the emerging products are key here. If you think of the ones that tend to get the biggest attach, you start with things like cloud management, right? So all of the operations portfolio, those are natural first attach, right? You're going to get to the platform, you're going to get things that allow you to go and run it better, right, and get more automation around it. So those typically have been historically a large part of the emerging products attach rate and revenue. But as we talk about Era, right, there's going to [ be competition through ] something like Era on-premises. And this is such a massive pain point for customers that has been something that is not just an add-on actually, it opens up accounts for us. It drives us into those new accounts, right, and just creates these new opportunities for us. So Era has been a big one. Files is something that had been running for a long time, again, complement to VDI and EUC in other cases, but now also expanding into more core large-scale data-centric type use cases, right, running analytics on large Files clusters, right? So this [ solution ] had been maturing, and they're now at a point where you're looking at operation automation, delivery services, unified storage with Files and Objects, right, and solution around networking and security. Those things are becoming too core to what customers can do from a platform perspective. And again, they're not just a "let me go and talk to you about this", it's part of the core offering we go to, to get you an account, right? You talk about the whole stack. We talk about the whole platform and what it can do for a customer. And you leverage those assets.

Just, Jim, to your question on the potential uplift from the emerging products, we haven't talked about -- we used to talk about emerging products as a percent of ACV billings. And we haven't talked about that lately, but I will tell you, I believe it's actually the highest point, I believe, in Q4. So not surprising with all these examples that you've heard of. So that continues to do well. And so the uplift, in general, certainly, a lot of these products, the ACV per core is substantially better on the emerging products as you might expect on some of these. We actually put a, as you recall, a slide in the investor deck talking about ACV per core economics growth from Q4 '20 through, at this time, it was Q3 '21. There was a 9% uplift overall without emerging products, and then you add the [ emerging price ] and it basically doubled with the emerging products. So a lot of dollars increasing then, just playing ACV per core uplift on these. So very important. Now some of the reasons why we start breaking out some of the stuff as we might get to on some of these solutions and packaging that we're starting to do here. Some of these emerging products now will be bundled into these solutions going forward. So they will get a little bit of lost visibility on some of these as they will go into an overall pricing of a solution, but they continue all to do quite well.

Makes sense, guys. Really helpful color. But I want to go back actually to this idea around sustainability, and productivity was up really strong double digits by my calc, Duston. Kind of a tough one to answer, but what kind of productivity improvement should we expect coming out of this headcount reduction that you just implemented over the next year to kind of hit numbers? Have quotas changed materially for the year? And I guess, how do you feel about the overall capacity of the team and ability to get into more bake-offs itself?

Yes. So the headcount reduction that we did actually in Q4 is more around some areas that we had -- it just didn't make -- it was kind of a tweener. We had coverage that wasn't -- it was just too thin in some areas, it didn't make sense, so we cut those back. Clearly, those reps didn't have enough bulk, if you will, within a region or a country or whatever. So we cut back there, handled it differently. But going forward, we had a target exiting FY '21, which we assumed in the Investor Day presentation. We're a little short of that, quite honestly, exiting '21. I think we get back to that level probably at the end of this quarter. We'll get close from that perspective. So then, going forward, there's so many levers from a productivity perspective that we were able to pull here. And what were assumed -- what we assumed in the Investor Day presentation, that once we got that targeted headcount rep, we really go FY '22 without adding many reps at all and even a little bit into FY '23. Again, there's so many things here with partners that Thomas talked to you about, not only those partners, but our own channel with this channel autonomy. We've got the emerging products. The execution continues to get better. Deals get to be more of the full stack. Obviously, the deals got to be bulked up. So there's many, many things there and then just playing back-office execution. So we feel good about the productivity, right? It's going to bounce around quarter-to-quarter a little bit. Like in Q1, obviously, it comes down. We're going to add reps in Q1, so obviously, it will come down a little bit. But that's been a big focus. It will continue to be a big focus. And we feel pretty good about where we are normally from a business and a top line, but how that relates to productivity and ultimately, leverage as we put forward.

Yes, we're coming up a little bit on time here, but I did want to sneak in this one. Like Red Hat, I think that GovCloud is another potential game changer for Nutanix. So I guess, what further steps need to be taken to get full compliance moving forward? And how will Nutanix, actually specifically Clusters, actually play a role in the JEDI contract that really has shifted to multi-cloud based on kind of the news that we've seen? Do you need to have more cloud integrations as Rajeev was kind of alluding to per kind of .NEXT? Or what needs to happen here?

Yes. So may I take this one, just briefly? I mean GovCloud is very important, right? It's very important for our own established customers in the government and public sector, so that they can keep on [ joining ] with us and actually have their hybrid cloud strategy working with Nutanix. And so that's something that's quite critical for us in terms of staying relevant and again, creating opportunities in those accounts, talking about this adopt, land, expand. In that area though, there's always more need to do, right? GovCloud is the first important step. And there's more certifications we need to go and acquire. They still need [ to go and build a ] control plane and so forth, right? So you do one, you expand your target market, and then you keep on going. So we're not done here. There's more cloud we have to support. Indeed, that's part of the equation. But there's more to be done just in the control plane itself in terms of securing and protecting it. So I won't comment on JEDI per se, right, but the whole idea here is GovCloud is critical. It's a stepping stone. It just shows that we've got what it takes to go there, right? And we're actually investing in that area to -- and stay relevant and become more relevant when it comes to public sector-type accounts. Duston, anything you want to add?

No, no. I think you covered it.

I think we're just about out of time, but maybe I'll just toss it up to either of you guys. Any concluding remarks you guys want to make about what you're really most excited about looking at 2022? Is it the amount of renewals coming in, Duston, that has you excited from a finance side, or Thomas, what [ more ] on the product side?

Yes. I think just quickly, we would tag-team this real quick, just kind of the things I outlined at the beginning. Clearly, renewals are a piece, but that's just a piece, right? That's going to help top line, that's going to help leverage. I'm excited about some flushing through all that we've been doing over the last 3 years on the subscription piece, starting to come to some stability here from that perspective, that's really exciting, finally starting to see all the hard work pay off into the business model, the stability. The product is doing well. The market continues to grow, a limited set of folks doing what we're doing. So I just think all those things, with the linchpin of the renewals finally flowing in and adding that leverage going forward, I think is really exciting over the next several years.

Go ahead, Thomas, a quick...

On the product side, I just want to say, I mean, we're feeling great about where we are. I think we've got fantastic solutions. We talk about the simplicity of the solutions all the time. What we're doing now is simplifying our go-to-market, how we get to transact. On the products again, Duston talked about bringing things together, simplifying the packaging and pricing, right? And so all of these, we've got a strong market, strong tailwinds, and it's all about making the most of this going into FY '22. So we're very excited about this.

Yes. Definitely. Well, it's an exciting story to me, too. But I think you guys know I could ask you another like 2 hours' worth of questions, but I'll let you guys go and I think we're up on time anyways. But thanks for joining us, everyone. And special thanks to Duston and Thomas here as well as Rich. Take care, everyone. Thanks.

Yes, Thank you.

Thank you.