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

Well, welcome, everyone. My name is Tom Blakey, and I cover cloud infrastructure here at KeyBanc. We're excited to have this morning here, a leader in cloud infrastructure, Nutanix. Representing Nutanix today is the CFO, Duston Williams here to my left; and the SVP of Product, Thomas Cornely. Thank you, gentlemen, for joining us today. So we'll just kick it right off here with Duston. Just given last week, you just reported fiscal second quarter. I'd like for you to maybe just bring everybody up to speed here, give us a brief overview in terms of what went well, what challenges you saw. And if you could adjunct for the group how's the environment been trending this year and even kind of halfway through the quarter here today.

Yes. No, we were happy with the Q2 results. For the quarter, ACV billings grew 37%. I think we've guided at the top-end of the range at about 26%. So that was obviously nice to see mostly from renewals. We had some early renewals come in and a couple of co-terms and things like that, that drove up the upside from the 26% growth estimate to the 37%. And if you kind of go down the P&L itself, revenues outperformed gross margins, outperformed almost at 84%. Operating expenses came in lower than we thought, a little bit lower, quite honestly, than we'd like. Hiring is still tough, and I'm sure we'll talk about hiring and things like that. So yes, we wish we actually had spent a little bit more. But -- and then you look at free cash flow as positive free cash flow, first time in about 3 years from a positive free cash flow of $17 million. So something that we're not at a sustainable level yet, but it's getting closer and closer, which we've laid out at Investor Day. So we were really happy to see that. And new logos, as we expected to return to a level that was, I think, okay, but in this environment, it's still tough to drive new logo ACV, and we're still focusing on that. But it's nice to see it to go up from about 560 to 700 new logos in Q2, still below where we were pre-COVID, and that has some impact, obviously, on new ACV, but we're continuing to focus on that. So overall, I think a very good quarter. And then if you kind of fast forward just for a second to Q3 guide, we upped the guide over the consensus for ACV billings. We don't guide to billings, total billings itself. But if we did guide to total billings, it would have been up over consensus a fair amount. And revenue gets a little impacted by the higher renewal mix in the lower term. But expenses, down; margins, good. And so all good from that perspective. Yes.

Good. It's great backdrop. You mentioned free cash flow, Duston, just stick with you for one more second. At your Investor Day, mid-'21, you provided a framework to reach free cash flow of $300 million to $500 million by fiscal '25; renewals as a percentage of ACV billings growing to upwards of 50-plus percent by fiscal '25. It's an important driver helping drive that free cash flow. And given the importance here that you just kind of mentioned in your -- last week on the call, you mentioned you're outperforming and slightly ahead. If you could just maybe discuss what -- you mentioned driving the co-terming. But if there's any other drivers that you saw or any of the drivers that you could be seeing here in the near term that could be taking place that can remain as outperforming and on target to hit those long-term goals?

Yes. So certainly, hitting those long-term goals, if you go down the pieces of the P&L, you've obviously got ACV billings, which we've been doing a nice job there. From a revenue perspective, that's term-sensitive, and terms have been really, I think, acting pretty much as we expect. It came down a little bit, probably 1/10 more than I expected this quarter just because of the renewal mix, and renewals have less than 2-year terms. So of course, you're going to get a little hit there. And on the ACV billings, just to back that, you've got 2 major pieces there you've kind of alluded to. You've got new ACV, and you've got renewals. And the renewals piece, all you have to believe is a couple of things: does the product value stay high; and then, do the renewal rates stay high; and do we transact those renewals within the cost parameters that we've set. And we've given it -- it's in the Investor Day deck, $0.10 to $0.20 per renewal dollar to transact a renewal as opposed to about $0.60 to $0.80 for new and upsell. And we're in those ballparks for renewal, ballpark for renewals currently. So that's good. I've talked about the new ACV. The new logo ACV, although it's not a -- new ACV, you have new logo and upsell. The new logo part, I think once we get out of this COVID environment, I think that's starting to happen. Obviously, people here gathering, which is nice to see. I think those new logos accelerate a little bit. The new logo ACV starts to accelerate. So we'd like to see that. So that's impacting new ACV a little bit. But then you got the upsell piece that remains pretty good. And again, of course, the revenue was term-dependent, but we predicted terms, I think, rather well. So I suspect that continues. The OpEx will continue to operate within the parameters we've laid out. And then the rest falls through operating profit and free cash flow, so we feel pretty good about what we've laid out. And this is a business model transition that we've been talking about for 2 or 3 years.

That's right, started 3 years ago -- over 3 years.

And so it's finally now starting to take place, and certainly, the renewals being the linchpin of not only predictability but leverage to the business model.

So the mechanics are there, and we're outperforming here, and we anticipate that to continue. The perfect segue to...

Well, meeting those objectives.

Meeting the objectives, I shouldn't say outperform. Thank you for clarification. But it's a perfect switch -- segue to Thomas in terms of the -- you mentioned product value staying high. So that's a big sentence there. So if we can maybe just start with an overview, Thomas, in terms of where you see the dynamics in the HCI industry today. What are the key drivers today? This -- obviously, this has been an evolution in terms of workloads on your platform, different hybrid cloud dynamics and whatnot. So we'll kind of just maybe start with your overview, and we'll talk about changing competitive dynamics and the sustainability of those dynamics.

Sure. Thanks, Tom. I think you kind of used the word platform, which is really kind of the linchpin in terms of how we're looking at the portfolio, and our customers are adopting the portfolio. If you go back, HCI, hyperconverged infrastructure, kind of the foundation. But in terms of the evolution of the portfolio the last few years, and we worked [ to deliver now ] to customers, it's all around bigger solutions that we target hybrid cloud platform in terms of delivering software-defined storage, compute, networking to build your on-prem private cloud, connect that to your hybrid cloud workloads and then complement this with higher-value solutions around database services, unified storage, driving automation through the whole stack. And so the whole discussion really has been changing, right, from being, look, I can get you a simple appliance for this particular set of target workloads to, look, this actually is infrastructure for your entire private cloud that can run all workloads, including your most busy, critical workloads, high-performance databases being a key part of the evolution in terms of what we're able to onboard nowadays. And because it's software-defined because it's hyperconverged, you do this on-premises, and you now have a clean store in terms of how you can connect that now to particular regions for true hybrid cloud.

If I could just double-click on that a little bit. This is KeyBanc's Emerging Technology Summit. We're going to hear about, from a lot of companies, trends about security, hybrid cloud infrastructure, data services you just, I think, alluded to there, Thomas. Are there any of these key trends or trends and workloads that are driving earlier solutions selling today? I know we're early on in the solution selling. For the audience, the Nutanix just recently bundled their products into 5 solution sets. We're early -- in the very early innings there, but I'd like to just kind of maybe double-click on that a little bit more in terms of anything kind of in the more intermediate term driving growth.

Yes. So what we announced -- a number of things that have changed over the past, I'd say 12, 18 months, right? Again, if you go back 18 months ago, we had a large number of products, which meant that you actually, as a customer, you have to procure those different products to get to a solution. We switched the go-to-market to actually be more focused on solution selling. Look, you're driving solutions for database services; you're driving solutions for private cloud or hybrid cloud, which involves automation and operations; driving solutions for end-user computing. So all of that go-to-market has been happening for a while. What we've done and what we announced particularly more recently is now aligning the portfolio itself in terms of packaging, pricing metering around those core target solutions, right? So it's not bundling per se. It's really around consolidating the portfolio itself and just structuring it in a way that makes it very simple to say, look, you want to go and deploy cloud infrastructure, this is the offering. You want to go deploy a cloud platform, which for us means infrastructure plus cloud management, operational automation, this is the offering. There's an actual SKU for that with the right price point. You want to go and actually deploy a database service on-premises to enable your application to use and consume database as a service, this is how you're going to do this, right? So a lot of it is actually about simplifying how you transact, how we go to market and kind of you completing the journey that we started basically 18 months ago. And let's go through solution selling. You start about selling 15 different products, focusing on 5 processing areas and now align how we transact those, how we price them. Now we can deliver them to our partners, our OEM and our customers, right? So it's a lot -- a lot of it is about simplifying things and having more velocity in our go-to-market.

That was a great overview. And Duston, this is -- I believe this is an important move for Nutanix in terms of simplifying the buying process and the go-to-market process equally. I think a key question that I have and maybe others in the audience have is what kind of percentage uplift we can see in terms of the solutions side. The customer is getting a lot more value in my opinion. I want to hear from you in terms of -- you also mentioned the importance of new logo in terms of a new logo wins and new logo ACV lift. Just trying to tie that together for us in terms of this new solution selling motion. And if you could wrap in again from the early days understood, are there any existing customers that have upgraded to a solution set? And what was that price uplift? And why did they upgrade?

Yes. So probably, Thomas, it's better to take a chunk of that. I think just from a new logo perspective, though, I think the thing I like about this change is from a sales rep perspective, it's easier, in my view, anyway, for a sales rep to understand and sell the product. And I think it's much, much easier for a customer to understand and how they consume the product. So in that case -- and I think we're probably better off with these solutions probably offering some price points maybe that we couldn't offer before, and this is all around new logos. And so I think if a sales rep can sell it easier and a customer can understand it easier and if it's more customizable to a certain degree, you would think that, that would be amenable to more new logo selling. So that's kind of what I'm excited about. Obviously, there's lots of other benefits, but -- yes.

Can I just maybe circle back on that before we go to Thomas? The new price points for new logo, does that imply that there could be some lower price points for certain bundle -- or sorry, so the solutions, not bundle, for new logos? And how would they expand off of that?

So I mean the whole price point discussion, right, in our industry is -- can get tricky because in the end, you have a list price and customers negotiate, right? So when you think about distribution selling, which is pretty standard, you're talking of the whole value of what I can deliver for a customer, and you deliver more value, you can capture more of that value, right? So it's not so much a price point discussions. It's more like, look, you're now seeing the value of what you're going to get, and that value comes to give you a recapture for -- on our side. But it basically implies how we go and tell our story and anchors us on the right component. I'm not selling you storage for hyperconverged. I'm selling you a cloud platform, right? What that entails is not just infrastructure, but it also entails all of the automation, management and operation that you can get to get self-service to enable cloud consumption for your resources. That's a much bigger value than just storage for workloads. And as a result, that will drive and that is driving uplift in terms of those transactions. And so it's not so much pricing but more the transaction size. What we are seeing -- and again, the simple things you can see, right, is in the past, so a customer want to go and deploy a cloud platform on our HCI infrastructure, they would have to basically procure 3 or 4 different products. We get the core solution, which comes with the hypervisor. You have to get a security component, which was a separate product. You have to get an operations product. You've got to get an automation product. So they've got 4 products. Nowadays, you can do that with just 1 product, okay? And you get literally, look, this is your middle tier of your cloud platform. And so we're seeing that actually happen with some of the new logos is, again, we're selling the value of the platform. They get a single SKU. They get access to the core technology they need to actually get that up and running very quickly. One of the -- on the technology side, one thing that's been a differentiator for us always, right, is our simplicity in terms of deployment and consumption. And so we're now able to go and take the technology that we have in the product and align that with how we go to market and how we deliver the full stack, right? So it's -- to me, it's really around removing friction in this whole go-to-market, telling the story and having that story actually land at the...

So the growth drivers used to be to -- from an emerging product perspective, you land and then you upsell in terms of products with the solution set, what will be the growth drivers there?

Yes. So you get to land more on the first go, right?

You get more upfront.

Yes, exactly. You get to land more on that first transaction, first of all. Now the way the portfolio is structured is we do have tiers, right? So there's always tiers in functionality. So the whole idea here is you're landing more of the core portfolio, which basically opens doors to go up the tiers later on, right, in terms of how far you want to go in terms of driving automation. For example, cloud, you get automation infrastructure. But eventually, you want to go and actually drive more automation around how you do application [ asset ] management. Those become uplifts and newer tiers that you can go sell to. Solutions like database services, that's a separate add-on to the platform. You want the platform, you can now add on database services.

Okay. And that's a separate solution.

So there's a number of thing that we have there, yes.

Well, I think we're under 10 minutes here. I have other questions. I want to open up to the audience if there's a question or 2, if anybody out there has a question for Duston or Thomas. No? Okay. I'll keep going. Sure, [ Jeremy ].

Just maybe around competition, and you mentioned a little bit on kind of where you're seeing the marketplace, but can you talk about the rip and replace opportunities versus the new build opportunities and kind of differentiate the 2?

Yes. Can I take that one? So there's -- I mean there's a lot of infra organization that's going on, right? So customers have been running on legacy virtual infrastructure with 3 tier standard storage-attached -- network-attached storage, where that's getting modernized here. And again, the [indiscernible] virtualized, that's one thing. That doesn't make it -- doesn't give you a cloud operating model by default. You have to actually go drive more automation across the whole stack, right, both in terms of the infrastructure and then the consumption model, self-service. So that's been the ongoing trend for us. That's been strong for HCI initially. With the new portfolio and the additions of driving automation, that's just getting momentum. The other side of the coin here is you're used to a discussion around an on-prem versus public cloud, right? And one thing that we've seen over the last couple of years with COVID is everybody went to cloud at some point. So now not talking of here, [ COB ]. I think public cloud is great, and it's going to be the solution for everything. We actually have customers that actually tried it. So it was great at, so it was not so good at, so it was very expensive for. And so the discussion we start having now with customers, they're based on facts. They're based on their own experience in terms of, look, I want hybrid. I'm going to have stuff on-prem for sure, but I want to make sure that I can manage complexity between the 2, right? So that's a big shift in my view. In the past, you have vendors basically telling stories to customers that didn't have firsthand experience of what that meant. In the last 2 years, you've got this acceleration of, okay, now we get it. And you've seen this big shift in terms of look, hybrid cloud is no longer a topic of discussion, it's a fact. People just understand the future will be hybrid for them. They're going to have multiple different public clouds, but they're going to have on-prem. And the question now becomes, how do I go and make my on-prem environments behave and be consumed like a cloud? So in the end, while I'm running on-prem, it's just another cloud from our workloads. That's really where we can be great at. This is a story worth telling to customers, right? This is what's running very nicely right now in terms of expanding the footprint, right? So there is modernizing, but in the end, you're actually going back to this whole portfolio. You're not just modernizing and replacing storage. You're actually selling a cloud platform because you will be consuming resources as a hybrid cloud going forward with a consistent cloud operating model, whether you're running on-premises or in public cloud. And so that's the big shift that we're seeing in the market right now.

I think that's a good segue, Thomas, to your new relationship or partnership, rather, with Red Hat, making these complex hybrid clouds work. I'd love to know and I'm sure the audience wants to know who needs who more? What happens here? Given the large RHEL and OpenShift installed base at Red Hat, I'd also like to know, again, along those lines, what does Nutanix bring into the table and vice versa? And if you can elaborate in terms of what do you believe is truly the addressable market in terms of RHEL and OpenShift installed base?

So who needs who more, right? We all need each other, right? At some point, if you do infrastructure, you want to have applications that need the infrastructure, and if you bring applications, you want to have infrastructure that it's going to run on, right? And this is why actually the Red Hat partnership is such a great match, right, 1 plus 1 equal 3, really, truly because there is no overlap here. Red Hat is really focusing on helping customers build new applications, get the entire stack using OpenShift as their own hybrid cloud platform at the app layer. But again, when you go on hybrid, you have to move back on-premises and that is around some sort of infrastructure, right, giving you compute, storage, networking, security. And again, this is what we bring to the table. So this is a fantastic complement of 2 strong companies. We bring that stack where, again, for OpenShift Red Hat has been the preferred HCI solution. And again, if you're building applications, you don't want to be worrying about infrastructure. I mean, if you go back to our story, and this goes back 5-plus years, maybe 10 years from foundation, we talked about we make infrastructure [ invisible ]. If you care about apps, you're a developer, that's what you want. You don't have to think about infrastructure. It's just tool that's run, you go, you consume sources, and they're just there, right? So again, great match in terms of what we deliver and what Red Hat can do on us. In terms of the impact for our -- because the Red Hat partnership is not just about those new applications and OpenShift. I think there's a big component of what the growth will be. But actually, the partnership itself was around having Red Hat support fully our own built-in hypervisor, AHV. So now if you think of customers today, right, running on a full stack up until that announcement, you could go and do Windows on top of our hypervisor, but you didn't have a complete environment for the full stack. So you got some VMware floating around in there, which was always getting in the -- adding friction to the whole environment. It's one more vendor, one more support point. It's just complexity. Now as a customer, I can see from my environment. I can take out different vendor and get my applications running natively on the complete Nutanix cloud platform. So it's great for us, good for customers, makes it simpler, good for Red Hat because in the end, they're competing with VMware. VMware is also entering into that space, right? Just [ including ] VMware from the very first day of our company's history. And so this why you have a big, big match, yes.

I'm sorry to interrupt, but I think you did mention that on the call that the RHEL and the OpenShift announcements that you had on our last week's call did use the Acropolis Hypervisor.

Correct. That is the big part of this, right? And this is -- again, so it opens up -- for us, it opens up all workloads, that's the first thing, which is a massive expansion in terms of our targeted workloads we can run on the cloud platform, right? And then going forward, it aligns us where new applications are being developed, right? And going back to this hybrid cloud discussion, which is in the end, I just want on-prem to be just one more cloud, I can go and use Red Hat solutions in public clouds. Eventually [indiscernible] back on-premises, we're ready to go and receive them with this partnership.

That's right. Well -- and maybe finishing up with you, Duston. It's a hot topic. We've been hearing about it for years now. See a lot of like cargo ships just sitting out there in the bay not moving. About the supply chain, I just wanted to hear from you in terms of, is Nutanix -- we know their unique position in terms of running on, like you said, a platform, running on a multiple different hardware platforms. Are you seeing this is a position that maybe help Nutanix gain share? And on the flip side, just help us and the audience understand, has this held up any revenue in the near term?

And again, the whole thing about choice, we're in different -- where our software runs on the NX appliance or Dell or HP, so whatever the customer actually want. But if you look at in today's environment, it is -- it's not getting better as I see it yet. I'm not sure it's getting much worse, but I haven't seen anything that's getting much better. Now the good news on our NX appliance, if a customer wants a Nutanix-branded appliance, our lead times have been a month or so, maybe less. So that is compared to other folks, if you're running it on some other well-known servers, that's a lot longer. So that's a great option for our customers to say, if they want to run -- now some have just say, I'm an HP shop, I'm a Dell shop or whatever, and we'll work through that. But yes, we've seen some things delayed clearly. Some customers getting some ridiculous lead times. It's kind of a one-off that I see there, and we can be a little flexible even if they want to procure software with the actual license start date and some things there. So we've been, I think, amenable to a certain customer situations and things like that. But it's still tough.

But no major delay -- nothing holding up your -- revenue perspective.

There's been no significant. There's always one-off that I hear about because a sales rep is yelling or a customer is upset rightfully so. But it has not been significant, but it's still tight.

And along those lines is probably -- go ahead, Thomas.

I was just going to add, like there's another dynamic that plays out here is for customers actually are waiting for hardware to get in because they're running or they're stuck with this particular vendor. And we're seeing people actually deploying on the whole solution in public cloud. So if you remember the solutions around what we're now calling Nutanix Cloud Cluster, NC2, which is available on AWS, we see a number of transactions this past quarter where customers like, look, I'm going to go and pin this up now in this [indiscernible] region on bare metal-as-a-service. I can get it up and running, start getting -- operationalizing the workloads. And when I get the gear on site, I just move them back, right? So this is yet another option that actually makes it simpler for us to actually land distribution as customers consuming faster by leveraging bare metal-as-a-service in public.

That was my question, so thank you. That was perfect. Perfect timing.

Very easy for the customer to do that.

And that is the key for the audience, too, is the simplicity of being able to move workloads back to the cloud and back -- some of the questions about hardware, about are people changing to go to virtual software licensing and whatnot. That's a strategic decision that takes even sometimes more than 1 month, if not 6 months. But with your product, it's a lot more flexible in terms of it's simple to move it. So I think we're up on time, if anybody has one final question. No? I want to thank Duston and Thomas for their time. That's very helpful. Thank you so much.

Thank you.

Thank you. I appreciate it.