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

Thanks, everyone, for joining. This is Parthiv from the software research team here at Jefferies. Excited to have Duston from -- Duston and Monica from Nutanix today. Dustin is the CFO; and Monica is the SVP of Marketing. So thanks for joining us.

Great to be here.

Thank you.

Awesome. I mean, you guys put out numbers a couple of weeks ago. I would love to hear your highlights as a management team, what you'd like investors to focus on and then we dig into there.

Sure. Yes. So we're very happy, not only with the Q4 results that we put up but also the guidance that we will be able to offer for Q1, which was an ACV billings growth of between 25% and 28% year-over-year. So that compares to the prior 2 years of Q1 year-over-year growth, which was roughly 10% and 14%. So really happy to be able to do that, but on the Q4 results, yes, I mean, everything, obviously, significantly over what we guided and the business continues to kind of flush through, and I'm sure we'll talk about this going forward here, but flush through the subscription transition. The exciting thing, I think, in the quarter was that we're starting to now get some term stability, although terms come down in Q1 just because of the federal business. But we saw revenue growth, the biggest and well over 2 years year-over-year, 19%, and so that was very exciting. Big deals played a key role in the quarter which was really nice. Sales execution continues to do well. The sales productivity for the reps were at record levels in Q4. The emerging products or newer products continue to really uplift a lot of the deal sizes and not only just the raw deal size, but also the deal economics as those products have played in. We got some new partnerships in the quarter, which was really nice. We'll start to build on those as we go forward. So I think overall, it was a really nice quarter. It's a good way to end the fiscal year. And I think we're off to a good start here as we progress through FY '22.

I imagine the business model transition has been front and center for the team over there for the last few years now. And maybe give us an update on where you are in that process, looking back, what's gone well. And then looking ahead to the next 3 to 5 years where you hope to end up on the product side on the go-to-market side? So I just talked through some of those initiatives.

Yes. So I don't know, I'd take it from a business model perspective and then Monica kind of talk about how the product has transitioned because when we took the company public back in 2016, actually almost exactly 5 years ago now, we took the company public. The product itself is more of a point product, HCI, and that's evolved over time, will continue to evolve. But from a business model perspective, if you go way back, it's been a laborious process for everybody, quite honestly. But if you go way back to the IPO time, we were running our software on, obviously, our own NX appliance. We had an OEM relationship with [ Dell and Lenovo ] but that was it. And we had all the hardware revenue on our books at 0 margin. So that was how the company was launched as a public company, a client-based hardware on the books and margins like a hardware company. And then in 2017, we started shutting the hardware, made no sense. Our software became pretty much ubiquitous eventually running on pretty much any server out there. So it made no sense to have pass-through hardware revenue on our books. And then more and more of our software being sold on HP and Dell and Lenovo and other partners along with our own NX Supermicro-branded appliance or Nutanix brand and Supermicro clients. And so we shed that, and then we ended up with all software, which was great, but we really weren't monetizing that like we should. So we took the all software after we got rid of the hardware. And then in 2019, early on, then we started transitioning that all software to a subscription. And that's the journey we've been on for the last 3 years, again, which has been a heavy lift to the business model because as terms compressed, revenue came down on operating profits -- losses accelerated, use of free cash flow accelerated. But now we're at a point now that we've got 90 -- last quarter, 91% of the top line was subscription-related, which is great. So from that perspective, we transitioned most of the business. So we continue to transition old life of device business over to subscription. But a lot of that work is behind us. Terms are starting now to stop compressing in the business model, starting to stabilize from that perspective. And now there's still a lot of heavy lift in the back office, setting things up to make sure the renewals process and things like that. We're really happy with where we are now from a business model perspective. And certainly going forward into FY '22 and '23 and beyond, we've laid this all out I think very nicely in the Investor Day deck that we presented on June '22, how we see this now progressing as we've kind of come to the end of at least, a push to subscription and now we get into the renewal flow and things like that. So that's a little bit of history, which was a lot of history over the last many years. But the product itself has also evolved quite a bit over that same and will continue to evolve more importantly. So Monica will give you a little update on the product side.

Yes, happy to, happy to. We've been one busy company, very nimble on our feet on many aspects. So on the product front as well, as Duston said, we started with our 1 flagship crown jewel, hyperconverged infrastructure product. But in the last many years, we have developed an entire portfolio of products, there were about a dozen [indiscernible], close to 15 products. What's happened in the last 2 years is we've converged on the notion of a platform now. So no longer are we delivering 15 separate discrete products to customers. Our intent is to deliver a platform where customers can run multiple workloads. They can run them on premises. They can run the same workload in the cloud using the same exact platform. So today, we are offering 1 platform for hybrid multi-cloud computing, which comprises of FCI as the foundation, but attached to it is the management thesis, so cloud managers, manager software and solution. Attached to it is all of the unified storage. So not just the block storage but files and object storage. So completely integrated both for virtual machines and containers. Attached to all of that, our database services and desktop services. So customers can deploy VDI and user computing workloads, they can deploy and automate databases. And surrounding all of that is a unified operations plane and a unified control plane. So customers can have a single view to the operations. And of course, security is built into the entire platform. So that's where we're evolving to. Is it 100% there? Not quite, but we've made huge inroads and we are now really positioned the platform. There are certain pieces of it that will evolve this year, and there'll be more of those announcements made. In fact, we have next our key flagship event next week, and we'll be making some announcements there as well.

Got you. Okay. And beyond SKU rationalization or product rationalization onto a single pricing model, what are some of the other go-to-market initiatives that you're implementing to help move the mix towards subscription and away from hardware and perpetual?

Yes. Duston, do you want me to take that one first or would you like to?

Yes. No, go ahead.

Yes. One of the other major, major approaches that we've implemented in the last, I would say, 1.5 years is solution-based go to market. Not really going to take individual products to market, rather focus on use cases and workloads that customers are deploying on top of our platform. So as an example, many customers are now interested in building hybrid cloud solutions. And so that's the conversation we are having. As a result, we don't end up selling 1 product. It's usually 2 or 3 or 4 products in the mix. Similarly, deploying databases. We have a solution, our database services solution called Era. And usually, what happens is as the conversation is about running database for close, it's about performance, it's about consolidating databases, it's about provisioning, management, administration. Therefore, we end up selling a solution that includes the infrastructure as well as Era together. And similarly, VDI, analytics, edge solutions. So that is a huge change, a shift in how we are taking our portfolio to market through our sales team, through our partners as well as how we are positioning it to our customers. The second big piece, which I think Duston alluded to, is really focusing on key strategic alliances. Obviously, there are very specific channel partners, and there's the volume of partners. There's also some big ones for us. In addition, we have key strategic alliances. You've heard about our Red Hat partnership that we recently announced. We are in deep partnership with HPE Lenovo as well. And there's a few others that are growing that you'll hear about in the near future as well. So those are very important leverage points for us, too. Whereas in the past, we obviously had the partnership but it was more certifications. Now it's -- yes, building deeper go-to-market partnerships with these partners.

Yes. No, that makes sense. And Duston, when we look at prior business model transitions towards SaaS and subscription, you tend to see the company captures some sort of uplift, right, as customers move from maintenance, perpetual maintenance to subscription, something in the range of 20%, 30%. Is that coming through now as the product is easier to deploy that are more deployment options? Consumption is widening across use cases. Are you able to capture that sort of uplift? Is that what you're recognizing as contracts come up for renewal?

Yes. So from the renewal perspective, we're kind of in the early innings of that. But I will say, and I'll get to that in a second. But at Investor Day, we laid out a slide. And the other big piece of this transition also that we did over a year ago now is we changed the sales comp from TCV to ACV because we were -- the sales rep of the company had different goals, right? The sales reps wanted maximizing of TCV, which usually came with higher terms and higher discount. We wanted better economics and lower discounting and we are at odds there. So now with the ACV focus, our ramp, our shorter terms have better economics. So rev is encouraged by that to do shorter-term deals. And what we've seen because of that itself is that the ACV per core uplift, what we showed there from Q4 '20 to Q3 -- we had at the point, it was only through Q3 '21. It was about 9% uplift right there. And then if you add the emerging products in, it would only probably more than double that for that 3-quarter period. Now on the renewals themselves. We, like everybody else, ultimately, we'll have renewal structure that will have uplift in pricing as renewals come conventually just like any other subscription company. So that's being kind of built in the back office there as we go forward. So to answer your question, yes, there's lots of opportunities for uplift in ACV per core, the base business, focusing on ACV, emerging products. Then you get to the renewal cycle potential, not only for uplift on the subscription, but you've got uplift from an upsell, just upsell perspective and things like that. So there's lots of opportunities as we continue to kind of flush through this subscription piece and then ultimately, the renewals, which start to accelerate really at the end of FY '22 and then into '23, which we've laid out an actual estimate of our renewals in FY '23, and then we've given an estimate also for FY '25.

Rajiv has been in the seat for about 9 months. I'd love to hear what his priorities are for you as a management team, heading out into the next couple of years? How that might be different from what we have seen from the prior CEO?

Well, I think if you look back, obviously, the company is in a different place today. Companies go through evolutions and revolutions and you have different objectives and goals and leadership styles and we're in an evolution now that has some different objectives and things. But if you step back at the very highest level, Rajiv's objectives/our objectives, obviously is, first and foremost, achieve everything we've laid out at the Investor Day. All the top line goals, ACV growth, all the renewals, all the business model transition. So that's another one complete this business model transition successfully. That's a big focus. Clearly, Monica can talk a little bit about it, but repositioning of the product portfolio, really articulate that long-term strategy around hybrid multi-cloud. That's been a huge effort that Rajiv has been kind of deeply involved for that personally from that perspective. And then I think probably the other one early worth mentioning is the enhanced partnerships. Historically, quite honestly, we haven't been a great company to partner with for whatever reason. Then going forward, you've seen a change already. I think you will continue to see a change on partnerships. And I think that has some really good opportunity from a leverage perspective going forward. And one of the most recent ones is Red Hat. And that's very exciting. Maybe Monica, just on that point in the partnership point, if you could kind of set up the Red Hat partnership as far as how we view that and the benefits to both companies.

Absolutely. Like one of the things I'd say before I go to Red Hat is, obviously, with Rajiv coming on board, we have very clear priorities. But the thing that I love about Rajiv and the way forward is, we have to stay on course. That is really our charter is. We've laid out the priorities, now stay on course and let's execute. And that's the big thing. I think that's why you're seeing Nutanix do so well in the last few quarters. As we are staying on course, we are focused on what we need to deliver. Now specifically to Red Hat. It's a very exciting partnership. Personally for me, too, I've worked with Red Hat in my past life at Oracle. I ran Linux marketing there for a period of time and Red Hat was a big partner of mine. The beauty is on 2 fronts. One is as part of our platform, we offer AHV as a hypervisor. The thing is now that AHV is fully certified with Red Hat Enterprise Linux. So that takes away any discussions that we ever had with any customer, any objection on, "Oh does ASP work as well?" That's a big deal for many of our customers. And we believe that's going to open up many doors and unstick some of the conversations that were stuck because of that objection. So that's one path. The second path, which is even bigger opportunity in the future is cloud native market. We partnered with the Red Hat and OpenShift is going to open up a huge opportunity with the cloud native space for Nutanix. Of course, we have our own carbon Kubernetes management embedded in our platform, which customers can still use, but that is relevant for certain types of segments of the market. With OpenShift, it's an enterprise-grade Kubernetes distribution and management. And it opens up huge opportunities for us to go jointly to customers and pitch cloud-native, both developing and running and managing those applications together. So that's what we're excited about. There's a lot of work to be done there. We're working actively with Red Hat to figure out our go-to-market plan around that.

When we go back -- when we think about the market 5 years ago, a lot of people expected enterprises to move to the public cloud and almost host a majority of their workloads on the public cloud in the next 5 years, which I think that progress is being made. But I think the consensus today is that, like you guys said, Enterprise IT architectures are going to be much more about hybrid and multi-cloud going forward. That's something we can only hear from customers in the field, right? So what are some of the customer pain points today as it relates to implementing hybrid and multi-cloud? And how are you guys helping alleviate some of those pain points?

Yes. Let me start with that, Dustin. So you're absolutely right on. I think reality has set in now, and there is no one, one bad. And it's really a hybrid model of operating for IT. And most customers are realizing that there is no single cloud that is going to solve all of their workload end use cases today. And when I say cloud, I don't mean a destination. I mean an operating model. Most of our customers think of cloud as an operating model. They can have their operating model on-premises. It can be in a public cloud, it can be with a service provider, right? The big issue that our customers are facing is they are running -- they're grappling with a lot of complexity of running and managing hybrid solutions across multiple clouds. So we refer to that as hybrid multi-cloud. Now that's where Nutanix comes in. Our focus is on making that cloud complexity invisible to our customers so they can focus on running the business and creating their outcomes. And we are essentially doing the same thing we did for the complexity that customers dabble with in the centers with running 3D architectures. We are now doing that for cloud. So for example, with the Nutanix cloud platform, we are now enabling our customers to seamlessly connect their private and public clouds, simply move apps and data if they want to, across the two and also licenses by the way. We provide the exact same license that's portable. So simply move apps, data and license across any cloud and they can optimize the workload placement and cost. They can decide which workload belongs where based on the cost. All of this while leveraging a consistent set of services and tools and IT processes. And that's where we come in, is helping customers navigate that complexity of managing and running across multiple clouds and building those hybrid on environments. It's giving them that peace of mind.

Yes, makes sense. Another question we get often is security and infrastructure, those 2 won't seem to be converging at the margin. And we see, for example, your peer, VMware, has built up a fairly sizable security business. I'm curious whether -- what's Nutanix's perspective on that trend? And how are you enabling that? And how are you positioning the product portfolio for that?

Yes, absolutely. I will be quick. I know we only have a few minutes left. So obviously, security is a top concern for our customers. And our strategy from the very beginning has to -- has been to embed security into our products and our platform and make it almost invisible, just like we've made the infrastructure complexity invisible. So at a high level, we are focused on delivering a secure cloud platform. We don't deliver security point products and tools like some of the other vendors do. But our goal is to embed security are these features, capabilities in the cloud platform, so it seamlessly integrates into our customer security ecosystem and they can further create a defense in-depth ecosystem by using other products. So we work very closely, for example, with Palo Alto Networks. We are working closely with Crowd Strike for endpoint security for -- with Splunk, with [indiscernible], et cetera. And there's a lot of rigor that you put into meeting the cybersecurity standards like recently, we got certified for the Department of Defense approved product list, which is unique to our FCI. So our security focus is embedded in the platform, built into the platform is what we deliver to customers.

Duston, maybe one last one. What are the biggest investor and misconceptions about the stories? What do you think about the Nutanix story? What do you think investors aren't getting that may be -- are taking a little bit longer to materialize in the numbers?

Yes, a good question. I think it depends a little bit on the investor. But I think in general, surprisingly, maybe as well but even to this day, I think some people continue to throw us into the hardware bucket, which is rather surprising, probably a little bit of legacy from our IPO days. We still have actually several hardware analysts covering the company, but we [ shed ] that significantly over the last several years and become a pure software company. So I think there's a little bit out there. And I think probably even a bigger, I think, anyway, a misconception, and you've heard Monica talk a little bit about the product portfolio going forward. And you'll hear more and more messaging on this, but I think there's a perception that we're just an on-prem company, right? We can't help folks, obviously, from a hybrid perspective and things there. So I think that's a huge misperception. And again, you'll see products evolving. You'll see messaging evolving there. And so we're much more than just an on-prem company. And then I think when you step all the way back, I think, again, I think we've helped a little bit, obviously, at Investor Day. But I think investors probably have appreciated how well the company really is positioned going forward, right? I mean the market is huge. It's growing. There's only a few true competitors that -- we really can do what we do going forward. So I think we're well-positioned from that perspective. The product continues to do really well and will continue to get better. We've got an NPS score of 90 over the last many years that's off the charts. We'll continue that, obviously. The partnerships are accelerating, so that's going to add leverage going forward. We'll complete the product offering and have more complete stack offering with and without partners. And then I think finally, you kind of cap it off with the renewal flow coming into the business model and the business model starts to get stability going forward. The renewals play a huge role, top line growth, bottom line leverage. And finally, pointing out the evidence that we've been talking about for a long time, the story that we've been telling for a long time is how the leverage of the business model goes forward here. And ultimately, which we put forward is free cash flow positive by the end of calendar '22, first half of fiscal '23 and then profitability by the end of the second half of FY '23 or the beginning of first half of FY '24. I think things are set up nicely as starting to come together, lots of good stuff happening in an environment that's a big market and we're a leader in that market.

Fantastic. I think we'll end it there. Thanks so much for joining both of you, and I look forward to continued success in the transition process. We'll be watching from the sidelines.

Thank you, [indiscernible].

Thank you so much.

Thank you so much.