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

All right. Well, thank you, everybody, for joining us. I know it's getting into the afternoon here on the last day, but we have the pleasure of having one of my favorite names, Nutanix. Rich Valera, IR; and of course, Rukmini as the CFO. Thanks for joining us, guys.

Thank you for having us.

Really excited about your here. It's nice to after that fantastic quarter. But one thing we're asking everybody at this conference is -- elongating sales cycles seems to be a hot topic. So I guess what are you guys seeing in terms of the elongation? Is it just international? Or are we starting to see that bleed into the U.S., North America region at all?

Yes. Interestingly for us, right, we haven't seen that elongation so far. So [indiscernible] words I say that. And in general, we haven't seen a change in demand for our solutions, and we've -- the EMEA has been good. Lots of companies have talked about Europe. For us, we have really the good -- minimum exposure to Russia and Ukraine and just more generally, that EMEA has done well for us. So yes, and in general, we haven't seen any elongation either more generally, right? So so far, so good. Obviously, something we'll continue to keep an eye on.

Got it. And so the other part of what's been going on at Nutanix is not completely immune to the supply chain aspects going on. Fiscal Q4 kind of spoke to that, especially on the fiscal Q3 announcement. And you and I, I think, we're talking post the quarter there around when you expect that to kind of normalize or at least start to get better. So as you're thinking about the supply chain in terms of what you've outlined for the fiscal '23 guide, one, I think you said fiscal second half '23 is when you kind of expect that normalization to occur. But is that true? Why does that give you -- why are you confident around that time frame? And then secondly, should we expect kind of a step function along that path, a linear progression? Or is it going to be more of a hockey stick kind of towards that normalization?

So I will start by saying that we are an infrastructure software company, right? Our gross margins are 83% in the [indiscernible] for a period. So really a software business. However, because we are an infrastructure software company, we're sort of closest to that layer of hardware on which our software done. And so that's where the example I sort of give is it's not a perfect analogy, but it's like if you had the Netflix subscription, which would be us as we are a subscription software, but you don't have the TV yet, right, to run it on. And so that's what we saw in sort of late Q3 -- our Q3 April quarter and in the July quarter, Jim. But to answer your question on what we see going forward into fiscal year '23, which ends for us in July of 2023. What we did say was it will improve in the second half of the fiscal year. And I think we should start by saying that we are not directly saying that because we are one step removed. We see -- our customers see it more than we do. Our server partners see it. And so -- what we're seeing today is that it's not getting any worse, right, dramatically? Because what [ our server ] partners are doing is where they have these components that are constrained, they're trying to find dual sources for them so they can sort of be flexible and maneuver through [ expense ] supply chain issues persist. But also if you listen to what some of our partners have said, many of our partners are sort of HPE, Dell and so on. They've also said that they're seeing potentially in [ times ] of '23 things start to improve. I will also say that we haven't imposed sort of a dramatic improvement to your point of hockey stick versus [indiscernible] assuming that first half through the end of this calendar year will remain more or less the same, and the next year more display starts to ease, meaning that it's not to improve, but it's not like at the end of the year, we're back to kind of normal levels, right? It's a more gradual improvement.

Got it. So that's the supply side. And one thing that -- especially with the macro environment that people are focusing in on now is what about the demand side of the equation. And did we get a net pull-in of demand for data center spending in the last 12 months or so that could lead to bookings falling off because we've already ordered this. And so obviously, you guys haven't built up a backlog here, and we'll get to that in a second. But what makes you guys confident we haven't had this big net pull-in of demand? And how do you feel about data center spending general speaking?

Do you want to start on that, Rich?

Yes. I mean I don't think there's anything we've seen that would have indicated both we're accelerating their spend ahead of any kind of normal pace. I mean, I think it's been pretty steady. If you go back to the beginning of COVID, I think we did talk about seeing a bit of a bump for BDI applications that lasted maybe a couple of quarters and normalized for the last many quarters. And I would say since then the demand has been pretty steady. So we really don't think we've seen any specific pull forward in to Rukmini's earlier point, we've seen pretty steady demand in these last couple of quarters. So don't really think that's the case, but we'll obviously be watching that closely.

Other thing that I'll add to that. One is, we said when we guided to our fiscal year '23 is that the significant majority of the growth in '23 is going to come from growth in our renewals business. And the way we think about renewals is we look at how much is available to renew, right, based on expiry dates of the contracts, and that's how we forecast that business and so that sort of by [ definition ], if there's some timing difference even when people renew it, but [indiscernible] is around when it's coming for renewal. So in that sense, it's more predictable again, but then sort of the new and expansion business, right, which is more likely to be impacted by demand. So when you think about our guidance for full year '23, it's in the new and expansion piece that we factored in some conservatism as it relates the macro. And then pull-ins, as we do look at some metrics internally, we look at how much a pipeline was set to close in a future quarter, but instead came in this quarter what would be an indication of pull-in. And there's always a small percentage that happens, right, for whatever reason, customer-driven typically, and we didn't see that number to come dramatically over the course of '22.

Okay. Makes sense. And you actually started going into where I wanted to go to. One of the things that really excites me about Nutanix and why I think investors really need to own this is around this term subscription transition and the fact that you guys aren't going to get a huge amount of renewals here coming up, it seems like, at least from what we calculate. And so I know you don't want to get into the necessary specifics between how to think about completely new, net new versus renewals. But how should we think about that balance between kind of each? Or what kind of guidepost can you give us for that mixture between what's going to come from growth -- in growth from renewals?

Yes. So I mean I completely agree, Jim, I think you certainly have sort of talked about this in your reports is that renewal for us is a significant driver of predictability and visibility of growth in the next few years and ultimately of leverage, right, in terms of the bottom line as well because we do transact renewals much more efficiently than our new and expansion business, so [indiscernible] renewals ACV is acquired at 80% lower cost than new and expansion business, right? So for multiple reasons, that business is important for us, as is new and expansion, right? But if you think about how to think about the mix, I think, is sort of the question that you're asking, what I think we've said is the new -- renewals business is based on what we've already sold, right? As we think about our growing base, that's why '23 is higher than in '22 and '24 would be higher than '23 and so on. So if you look at our Investor Day last year, where we had laid out -- my predecessor actually [ Duston ] had laid out what we think of mix. And for 2030, it was about 25% of ACV being renewals. We are tracking above that, and we talked about that publicly in terms of just how renewals outperformed. And as I talked about earlier, in new and expansion we were taking some conservative on the macro, Jim, right in our guidance. So that's also why we think that we'll be kind of ahead of that 25% number in fiscal year '23, that's what I also say this is another kind of things that were still grow 50%. It's not like it's a mix of 50-50 yet, right? So there's still room for us to do for that mix to continue to grow for renewals mix to grow. And along with that bring more growth visibility and operating leverage.

Makes sense. Out of the panel we had this morning from CIOs. In fact, I know there's one in the audience because he runs our organization here. We heard a little bit about instead of making a multiyear commitment to something we might see a little bit of a trade down on some of that. Are you guys seeing any of these kind of typical, let's say, 3-year duration customers or even the 5-year duration customers that you still have move down from -- instead of a 5-year, we go to 3 year or 3 years goes down to 1 at all?

Yes. No, that's an interesting point. And Rich, you can chime in to add color. So for us, where we are in our journey given we started the subscription journey just about 3 years ago, we actually haven't seen too many 3-years come up for renewal yet. So that volume is sort of ahead of us, if you will, in '23 and beyond. But that said, I wouldn't be surprised if that happens again, given just the environment wherein people may want to say I don't want to spend all the money to go and we do collect upfront where we collect cash upfront from our customers. I can understand what people may want to not lay out that kind of capital. How we think about our framework for this is making sure that, one, if we want to retain that customer, ultimately, we want to grow and expand with that customer. We want to do what's right for the customer. At the same time, we also want to make sure that the economics work for us. What I mean by that is that we are doing a 3-year transaction, renewing a 3-year customer for another 3 years, and that customer says actually I would like to do a 1-year transaction, then the annualized value of that 1-year transaction is going to be higher, right? The threshold for them could be higher than it is for a 3-year transaction, as you can imagine, right? So those are the kind of [ rates ] that we have for our renewals' team as they think about transacting on those 5 versus 3 versus 1 year.

Yes. So fiscal Q4 was a phenomenal quarter, and we have some larger deals there that closed nicely and let's say those can be lumpy. But how is that pipeline for those larger deals, especially because ever since Rajiv really came into the picture. It's not really been about the total customer adds. It's been going after the big logos that matter. So I guess what are you seeing with those larger kind of pipeline deals?

Yes. So those are always great, right, to have them. And on a quarterly basis, it can be harder to predict, right, to your point, Jim, and that's what we saw in Q4, right? But we knew those were in the pipeline. You never know whether you're going to add -- land in Q4 versus Q1. So the pipeline remains good for those. I mean, those are also expansion deals, as we talked about in our earnings call. Specifically, to your point on new logos, yes, they're focusing on quality, not just purely the quantity of new logos. But we also realize that in often, it's a smaller land, right? The first interaction or the first order we get is important, and we want to get there. But often, the expansion is really where these significant transactions come in. So a lot of the -- [indiscernible] talked about in our earnings call in Q4, our expansion deals. So that's significant motion for us, and we expect we'll continue to nurture those as we go along in '23.

I'm sure you don't want to get into the specifics of what you're thinking about that, but you're talking about expansion really driving the business. And so you gave out the metrics around net retention in the year. Is there any relative way to think about how we should be essentially modeling that for this fiscal year relative to what we did in fiscal '22?

Net retention rate, right? So what we said in fiscal year '22, which is the earliest ended in July, was that net retention was 125%, which is something we're very pleased with that result. What I would say is -- if you go back to kind of how we talked about the fiscal '23 guidance, right, and how we approach that, clearly, renewal is driving a significant portion of the growth. And we have baked in some [ kind of item ] in new and expansion piece. It really kind of depends on how the macro situation plays out, Jim, and what that 125% number does in '23. So we haven't given out specific guide on that number, right? But that's the way to think about it, right, in terms of like new and expansion.

Okay. Fair enough. And moving down, essentially P&L there. One of the most exciting parts is we're talking about Nutanix on a free cash flow basis here in the future, right? You're talking about -- you look at that plus $300 million kind of guide in the fiscal '25 time frame, valuation is super compelling, I think, for investors, at least that's my opinion. But in terms of the near term, obviously, we had a headcount reduction by about 4%. So really, my question to you is how has that head count reduction been going in terms of the morale. It's a tough thing to do, especially in this environment overall. And what other levers are driving this positive free cash flow note?

Yes. So look, these decisions are never easy. I think this shouldn't be easy, right, because we're talking about sort of people's livelihoods here. So we did make -- we did not make the decision lightly. And we -- what we've done is when we thought about just our overall planning for '23, we did some really detailed expense review, as you can imagine, and thought about different levers that we had as we thought about '23 planning. And when we came to the sort of conclusion of having to do this 4% reduction in force, we were -- we did our best to explain to our people why we did that, right, and the logic and the rationale for how we approached it. We -- the majority of that reduction was in sales and marketing, our go-to-market organization, which is where we have sort of had the most efficiencies that needed to be gained there. We also had our first sales kickoff in-person after COVID and use that opportunity to talk about -- we have a new CRO, our sales hero, so he's been at Nutanix 5 years -- 5-plus years, right? So he was very much involved in this process. And so we used that opportunity, he used that opportunity to talk to our people about here's why we've to do that. Yes, it's difficult. It is always hard to say goodbye to colleagues and friends. There's why we had to do it. But also to then talk about here's what it means for us. Here's how we need to look forward. Here are the priorities. Here's how you can -- here's how we think about the sales plan for '23 and so on, right? So we used that to hopefully communicate to people to why, but also to look forward on what's ahead in '23.

Okay. So on that $300 million of cash flow that I think investors are really focusing on what was great to hear you kind of come back and say, "We're going to get this at least." I guess what now 90-ish days a little bit north of that days later, gives you the confidence that we can get to that -- leave that $300 million, what would prevent Nutanix from at least hitting that number?

Yes. So let's talk -- and I think your question's on different drivers for that number and how you think about that and just we'll also address what's changed in the 90 days question. So for us, one is just overall growth, right? Just growth in that top line, the billings number is a big driver here. So that's going to be critical as we go forward here and then going to point us back to how the renewal growth helps us reduce risk on that overall because our growth retention rates are 90-plus percent. So that top line growth is a driver. Secondly, the mix of renewals and that just means that there's leverage in the model, right? So that certainly helps overall. And then thirdly, being really disciplined, I think we've demonstrated in the last couple of years on operating expenses and working capital management, right? So those are -- those combined, I think, is what we feel good about. And to your question kind of what's changed, Jim, in the 90 days from when we reported our April quarter to the July quarter. I'd just say in the April quarter, we had this new variable that was introduced and some of unanticipated of the supply chain dynamics, and we thought it was prudent to make sure we understood that, right, both the near-term and the medium-term impact of that before we came back and were able to talk about this $300 million-plus.

Okay. Makes sense. We have a decent crowd here for questions. So if you have questions, feel free to raise your hand. I'll call on you. But I want to move over to the competitive landscape side, there's this tiny company that Broadcom is trying to buy that you're pretty familiar with, VMware as your competitors, pretty much your main competitor here. So as you're thinking about that transaction, what have you seen from deals in terms of the win rates against VMware, the competitiveness of VMware sales hiring even from, say, VMware.

Yes. So I talk about customer then maybe, Rich, you can take the talent piece of this, right? So I would say, look, we remain focused on our customers, right, at the end of the day. And to your point, Jim, this announcement of Broadcom acquiring VMware does inherently introduce some uncertainty, I think, for customers. And so we want to be there for our customers, right, kind of help them navigate that, to understand why we win in the market, right, and our 4 differentiators. We have complicity and delight for our customers. We provide them with choice. We have a unique data-centric approach versus sort of their more [indiscernible] view compute-centric approach, which you could argue, compute is getting commoditized. And then fourthly, our just industry-leading NPS score for our customers satisfaction of 90, right? So just talking to customers about that has really been our focus. In terms of win rates, we do look at those, but those have actually even before this transaction, Jim, has been actually trending quite nicely for us, trending upward nicely year-over-year. So that remains our focus and will remain our focus. I think folks can draw their own conclusions in terms of what Broadcom's playbook has been in the past and what it might mean to the extent they follow that same playbook here with VMware. But we are going to be there for our customers to sort of guide them through this uncertainty and provide them an alternative, right, a very viable alternative that -- with a very high customer satisfaction as we think about that opportunity. I will say that we haven't factored in anything in the near term, incrementally for our '23 guide, right, as it relates to this transaction. And the talent piece is important as well. So Rich, do you want to talk about it?

Sure. I'd say even prior to this transaction being announced, we've had some history of getting some good talent from VMware. Rajiv, not the least among them, I think it's fair to say that since the announcement, we've had a pretty big uptick in sort of inbound inquiries of folks looking for potential options, depending on what happens with that transaction. We had some success in hiring some new folks, not huge numbers, but we have, and we think there's great talent there, and we're certainly going to be looking at them as they will grow alternatives.

Got it. Last one on the whole VMware competitive part, but obviously, they have their new VMworld user conference, and they announced vSAN 8. And so the question is now coming up, what does vSAN 8 do versus what Nutanix does. So how does -- it's been a few weeks. And I know, Rukmini, you're more on the financial side, but you know the product set really well. So is there a way to understand how Nutanix is still differentiated versus what kind of announced that VM Explorer now with BCMA.

Yes. So look, we believe that we're still competitive, right, from a product standpoint and even with vSAN 8 that they announced. We are AOS 6.5 released. Had some really great advancements as well that we put out there on the data side, on the security side and so on. So look, we don't think any single release from our competitors going to change this landscape here materially, and that's true in this instance as well.

Okay. On the -- one of the newer things, I think it was announced about a year ago was the new packaging and pricing modules. How does that influence that net retention rate? Or is that actually more been an impact on landing a new customer because it's like here's that new simplified version. I think there's about 5 SKUs there.

Yes, it's a bit of both, actually, Jim, and it's about 6 months, have actually launched in February, right? We've been around for a few months. Yes. And I would say what it's allowed us to do is to simplify how we articulate and present our portfolio to customers. And it's also likely been simpler for our own sellers, right, to think about it and transact on those, right? So we've got these sort of really largely 4 solutions [ Nutanix ] cloud infrastructure, which is our core platform, the [indiscernible] cloud management, which has allowed you to manage the cloud on the private side and I [indiscernible] the hybrid environment, if we so chose. So we're going cloud infrastructure, cloud management, unified storage and database services, right? So those are sort of the 4 solutions that we're going to market with. And like I said before, our strength has always been around data and data centricity and data services. And so this aligns nicely with that. It also happens to be how our customers think about solutions and what they're looking for, right? So one of the -- it's still early, it's only been 6-plus months or so. But one of things we've seen, for example, is the attachment of the cloud management has picked up nicely, right, with the go-to-market motion. So certainly, for existing customers to sort of consume more of the portfolio, that's to your point on NRR. A bit early to kind of say if it's showing up in that number in a meaningful way yet. And then for new customers, we have to see some new customers, new logos, who have adopted just way more of the portfolio than they would have, right, if it was at a different go-to-market motion. So certainly, it's also helping out, like I said earlier, our sellers be more productive, right? Because they are able to just -- the whole transaction and how they quote and how they sell it, is simplified quite significantly.

Got it. And actually, before going into cloud management side, obviously, out of Q3, the other aspect beyond the supply chain was around the sales kind of attrition stuff. So what are you seeing with kind of the sales team, especially on the what I call hunters instead of the renewals team, where the issues were.

Yes, yes, exactly. So our field sellers who are focused largely on new and expansion ACV, right? So in our April quarter, we did see attrition pick up in that -- that's what we talked about in our April call. In the July quarter, we saw attrition actually came back down in Q4 compared to Q3. And we saw overall sales rep hits look largely stable, right, in the July quarter versus April. Now look, I think this is something we'll -- we've done a lot for making sure that our sellers understand the vision, simplified the go-to-market in the portfolio as we just talked about, we had our sales kickoff where we put a lot of emphasis on just what -- how can they need and exceed their numbers, all the support they have. So we spend a lot of time on that. And it's frankly great to have an in-person SKO. It's the energy, I would say out there, too, in Vegas and the energy was great. So a lot of focus on that as I think there should be. And so -- and then as Rich talked about, right, just we'd like to grow our rep capacity slightly. We're pretty close to our target sales rep levels, but a little bit of room to go and will be targeted in sort of who we go after to make sure we're capturing our own fair share of the talent market as well.

Got it. I think we have time for one more. Otherwise, I'm going to circle back in cloud, anyone's got it. Okay. Good because I wanted to ask about cloud anyway. So one of the things that we hear about regularly is why is it Nutanix just a band-aid to moving things to the cloud. And you actually talked about like one of the modules that's really growing well is cloud management. So it kind of brings in the idea of the competition versus the hyperscalers, right? And the Amazon has Outposts, Azure has Stack. So how are you helping across the hybrid environment. Why does the customer need Nutanix if they're going to start moving workloads to the cloud?

Yes, I think it's a great question. And we think of our applicability and of ourselves as a hybrid cloud infrastructure provider, but also multi-cloud, right? So it's hybrid and multi. Hybrid being, you have some workloads on the private, on the on-prem and some on public cloud. Multi-cloud meaning you might use multiple public clouds, right, in your environment. And so both of those we view as being -- having a role to play there. And so for us, if you think about -- most companies we believe are going to be in some form of hybrid, right? So, clearly, the public clouds are growing really fast and huge market over there. But if you're in a hybrid world, you need to be able to manage sort of that environment seamlessly across both. And that's what we can help folks do with our sort of unified kind of cloud management platform. It also allows people, by the way, from a migration standpoint, for capacity expansion and so on. We have a partnership with Azure, right, which we've talked about publicly. So Microsoft Azure clusters product on Azure is in public preview right now, which we're really excited about and will be generally available here in the near term, and that's a joint effort with Microsoft. So clearly, they see some value in this as well.

Absolutely. Well, we're out of time, but I really appreciate your time for flying out here and safe travels back to the West Coast. Thanks, everybody, for joining us.

Great to be here. Thanks.

Thanks, Jim.