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

Right. The customers wanted to figure out what's the use case, how are we going to try it? What are we going to do? And then we actually get the hardware to deploy it, right? So those are just another [indiscernible] wanted to...

Yes, it's an important point, Rich. Thank you. And so what we offer is, it's our base Nutanix Cloud Infrastructure Platform. So it's the exact same platform, right? And what we are saying is to make it easier for people to deploy their Gen AI models on. We have combined that with some operations and management capabilities. So AIOps, it's not ours. We've sort of curated a set of AIOps capabilities that folks can use. And then we also offer the ability for them to bring their own large language models in, right, the open-source models that are available to then create a solution that they can then use to actually run and train their models. So people are wondering how can I put the infrastructure together that I can then run my models on, and we have made that easier for them, right, by this curated stack that includes our cloud platform, along with these other layers, and the ability to bring in an open-source L&M model that then helps them get up and running in a fairly quick way. A couple of other things I'll say in terms of this whole Gen AI opportunity. One is that we believe that these models will run, ultimately, Mike, where the data resides. And so what I mean by that is people may use the public cloud, for example, for the generic training, right? So you're using some sort of publicly available domain data to train the -- do a generic training first. But after that, typically, people have to train the model on their proprietary data. And that may sits on-prem, they may not want to put it on the cloud, because they're worried about where that goes from data sovereignty and privacy perspective or it might on the edge, right? And what I mean by edge is if you're in a retail location and you're doing some sort of fraud detection or some visual inspection, that data sits in the -- first of all, locally. And the AI model and the results also need to be available locally. And right away, you can't say I'm going to send it to the cloud and then take some time for it to come back. But it's a fraud detection, the fraud has already happened and person has probably left the store already, right, by the time all that happens. It has to be local. So we believe that these models will ultimately or at least, as they get to the fine-tuning and inference phase, will have to sit where the data resides, and that's where we can play a part there. In terms of use cases, we're seeing 4 main use cases. So one is fraud detection, I already alluded to, and that's -- and then the second one is around documents, like document search, document retrieval. Obviously, there's a chart text component to that. So that's the second one. The third one is around developer like co-pilots, things like that. So we're looking at that internally as well, as I said earlier. And then the fourth one is around customer support, right? So if you're a call center agent, then how can Gen AI help you look at knowledge base. If the question comes in, the Gen AI is able to look at all of these knowledge-based articles and summarize something for the agent to handle. So those are the 4 use cases, and those are across verticals, right? We haven't -- it's across financial services, government, federal, retail, legal. So it's really across a bunch of different verticals that we're seeing. So a lot of conversations. But as Rich pointed out to, we think this will be a -- it will take time for it to get to a place where people are really using it in production and in driving workloads. But this is a new workload for us, right, that our platform can run and help customers run their Gen AI workloads.

And if I shift over to, let's say, partnerships, so the go-to-market, I think on the partnership front, you guys significantly maybe announcement around the Cisco partnership, right? They have the end-of-life data out there for HyperFlex. And just for folks here, can you discuss the opportunity there as far as maybe what's expected from yourself and Cisco as far as contributing to that partnership to ensure its a success?

Yes. So this is an important one partnership for us, Mike. We announced it back in August. So still early days. But what is interesting about this partnership is that Cisco sellers get compensated for selling the Nutanix solution just like they would for any other Cisco software solution. They can retire quota, et cetera.

The retirement quota. Yes. Okay.

So that is -- that's great, right? And for them -- and soon after we announced this partnership, they also announced end-of-life of their HyperFlex solution, which is in the market. And so there's no conflict, right? From an internal perspective, it's not that there's another solution that's competing from Cisco. It's now clear that they are end-of-lifeing that and their sellers can go and sell Nutanix instead. Now what they get from this is that we are one of the leading solutions in the market. I mean I think of dataset infrastructure for modernizing data centers. And so their sellers have a winning product in the market to go and sell as part of their portfolio. And over time, could also maybe help drive some of the rest of their portfolio, right, as you think about what it means for a hybrid cloud in a multi-cloud world, where we can be a platform that helps them drive that narrative with their customers. For us, of course, it's a great route to market, right, in 2 levels. One is there's the base HyperFlex business, which we believe, given their end of life did over time, we'll have an opportunity to transition those over to our platform. And then beyond that, there's an opportunity with the general Cisco go-to-market engine, right, which is obviously really large and well-run GTM, go-to-market machine, a strong channel presence, right? So how can we work together, so they're able to drive more of the Nutanix solutions more generally into the market. Now the fact that their sellers are getting compensated for our solutions is great, and we're excited about it. But it's also -- on the other hand, we have to just work to make sure that we get that mind share, because it's one of many solutions right that Cisco is offering. So how can we -- so we're doing a lot of the enablement work right now with their sellers to make sure they are -- and specifically with their data center specialists. So they understand how to pitch Nutanix, right? And what's the value proposition? And why is this better than the alternatives like all of that? So then they are equipped to go in and be more effective in the field with it.

So 2 points building off of that. But the first with the Cisco partnership, is the margin structure consistent with the overall corporate profile? Or like how do we think about how that partnership is structured when translating that to the Nutanix model? That's the first. And then the second guidance today, does that embed any benefit or contribution from the Cisco partnership?

So first one on, I think the margin profile was your question, Mike. So the HyperFlex piece, by the way, should all be greenfield for us, because customers will not have HyperFlex and Nutanix already running and its due to our customers that we don't have today that are coming on to our platform. And we are also hoping the same from the broader opportunity that where we get customers -- I mean, of course, Cisco's customer base is huge, much bigger than ours. And so how can we get incremental opportunity coming in. And because of the way the partnership is structured, yes, it's intended to work within our financial -- broad financial profile as well, while being a win-win, right, for them as well where it works. And so what we've done is when we've set up the guardrails around compensation and things like that, we've tried to make sure that it is truly a win-win. And what if they bring us incremental business that we weren't talking to before or that we didn't have, that they get compensated appropriately for that. But if it's a customer that we were already talking to for a long, then -- and then it happens to still land on a Cisco seller, for example, or they also bring it to us, then it will be a different incentive structure, because we truly want to make sure that this is incremental business that we're winning. So that's how it is structure and does, yes, broadly fitting with the overall financial profile that we've laid out for ourselves. Now the second piece around your question was on guidance. And so -- still relatively early days. We have won some deals with Cisco, Mike. And most of those, almost all of them, as you can imagine, right, are ones that -- but they were already very far along. And so when the end-of-life was announced, they switched over to a Nutanix solution. So those are the ones that we've won. And so what's baked into the guidance is a small benefit from this, mostly toward the tail end of the year, because we think it will take some time just for enablement and for the sellers to really to get familiar with the product. And then outside of these deals where they were already far along, the sales cycle itself is 9, 12 months, right, in some cases. So a small benefit mostly towards the tail end of the year.

Okay. And just for a reminder to folks to who are thinking about that partnership, it makes sense, you would be feathering that in at the end of the year, because that partnership was only announced in the October time frame. And to your point, if we're thinking about those sales cycles, I agree. I just want to point that out to the audience for them tuning in. And if we shift over to public sector for a second, right, and the success you guys have seen in that vertical. But first, had Nutanix made specific investments in public sector that are bearing fruit in the most recent results? Or how would you guys attribute the recent wins in public sector versus how you guys have been investing?

So a few points on how we think about the U.S. federal sort of public sector business. And we actually call it federal, because we have a separate motion around like state and local governments, right? So that's sort of a slide piece. So what we said on our last earnings call, which was for the quarter ended in October was that the federal business -- U.S. federal business had a really strong quarter, right, which is really significant new and expansion ACV growth year-on-year. So it's a strong Fed quarter anyway because it happens to be the federal year-end, but it exceeded our expectations on sort of what we said. Now in terms of investments and how to think about that as a vertical more generally, Mike, we have really only 2 areas where we have sort of a verticalized specific go-to-market motion. One is federal and the other one is health care. And so yes, it has been a sector or a vertical that we have actually put specific resources into overtime. And this -- so nothing necessarily changed dramatically, Mike, in terms of our effort, okay, that we didn't, for example, announced some new certification or anything like that, okay? And this quarter, though, the October quarter, did end up being more than we expected. And it was actually across agencies. It wasn't just civil or it wasn't just civilian or defense, and it was up to across several agencies where we saw the strength. And I don't think we were alone also, right? There were a lot of other companies, who also kind of shared that kind of strength in the U.S. federal business. And might have had something to do with what was happening in terms of the continuing resolution and the budget and so on, it's possible, Mike. But like I said, there wasn't anything that we change specifically as it relates to prior to that quarter that we believe drove that outperformance. And so yes, we'll have to see, but it was a good -- definitely a strong quarter for -- from that perspective. And it's an area that's been strong for us over time. And that quarter does tend to be an outlier because of the fiscal year end, and it was just better than we expected.

Okay. And if we shift gears to renewals, right? I know that the company has spoken about the availability or the available to a new pool, right, the ATR. And so -- correct me if I'm wrong, but I think management commentary is that in fiscal '24, it's going to grow at a slower pace before we're expecting to see a reacceleration in fiscal '25. And so first, is that the case? And then second, can you talk about the visibility that you have or remind folks why that is as far as that expected reacceleration in the ATR?

Yes. So you said it exactly right, Mike. And I want to emphasize that is available to renew pool is simply a view of licenses that we've sold previously, and are coming up for renewal. That's all it is, right? And so we can -- because we have now the model that we are in, we have visibility. We know exactly when licenses are up for renewal, and we can see that the volume of that. So the ATR itself does grow year-over-year and will continue to grow for several years because of where we are in our subscription journey and the way the waterfall -- the renewal waterfall works. So it is growing and it is -- we expect it to grow this year as well. We just said it's going to grow at a slower pace for this '24 compared to '23 and then will reaccelerate in '25. So you said it exactly right. Now the reasons for that -- this is, again, a natural sort of outflow. So there is no renewals pipeline. It's just stuff we've sold before. And so what happens in terms of the ATR pool or cohort is a reflection of what was sold previously and the durations of those transactions, right? So it's sort of 3-year and 3 years ago versus a 5 year or 3 years ago, and those are all the dynamics that go into the ATR pool. And so you might have heard from other subscription companies who also say the cohort this year looks like X or Y. And so this is our dynamic for the cohort. The other factor we talked about was around in July of 2023, which was the last month of our last fiscal year, we've had quite a number of things that drove in some more renewals coming in a bit early. And our philosophy around this is if a customer wants to renew with us, they want to give us the PO, the purchase order, a little earlier than it was due. And they do so at good economics. We're happy to take that because ultimately, we want to make sure the customer is happy, if we're able to retain them and they're transacting with us at good economics and hopefully growing, right, their footprint. And so we saw more of that than we had expected for July, and we get a question in terms, Mike, that says, why wouldn't that happen again in '24, right? And so yes, it might. But that's why I want to take you back to the first reason I talked about, which is around the cohorts, right, and how they just fall over time. And based on what we can see right now, our current view and our view when we gave guidance for the first time, this cohort is growing, but growing at a slower pace compared to last year, and we expect it to reaccelerate in '25. And so to the extent that evolves or changes, of course, we'll definitely sort of make sure to take factor that into our assumptions and our outlook, but that's what we saw and that's what we guided to.

Can you discuss -- is there a way to think about renewals and the contribution from renewals to billings? Is there a relationship there to delve into that you could help with us?

Yes. So maybe start with a couple of metrics, Mike. So this ARR, which is annualized value right of our installed base. And then there is billings, which is something that's transacted. So one is a stock metric if you will. The other one is more of a flow metric. And on ARR growth, right, renewals themselves aren't quite -- they help us retain the base of ARR, right? So we can then grow from that base. But -- and we do get appreciation. I mean if I sold you something for $100 an ARR 3 years ago when it comes to -- we're going to expect that to be renewed at more than $100. So it does help ARR growth in a smaller way, but it's about retention really, I think. When you think about billings, though, remember, billings is everything that was transacted in any given period, and that includes renewals and new expansion. And when we say billings, I mean total billings, total contract value, not necessarily annualized, right, or ACV billings. So what we have said, Mike, is over time, the proportion of our total billings that will come from renewals will continue to increase. And that is purely a passage of time, right? Because again, we are a relatively young subscription company. And so as more and more of the subscription licenses that we've sold come up for renewal that ATR pool, as we talked about is going to continue to grow, which means that the renewals mix as opposed to total billings will also continue to grow. So what we said at our Investor Day back in September was in fiscal year '23, about 1/3 of our total billings was renewals. And the rest was new and expansion, okay? And so that's how to think about the contribution. And we expect that the third will continue to increase. So we said by the end of the period we laid out fiscal year '27, about half of our total billings will come from renewal is what we expect versus new and expansion. And that helps us with 2 things, Mike. So first one is it somewhat derisks the growth, right? So the bigger proportion coming from renewals means that we have visibility over it. We can see it, right, we know when it's coming up. And we have more predictability and more confidence in it, because our GRR, our gross retention rate is 90-plus percent. So you consider, okay, for that portion of the billings, you have a 90-plus percent level of confidence that it's going to come in, okay, when we say to put versus new and expansion which is, of course, we have to go and transact that, right, every quarter, every year that has to be gone and procured. So there's a level of visibility and predictability and confidence from just the higher the mix of renewals going into any period. Now the other benefit we've reached from that growing mix of renewals is just bottom-line leverage, because $1 of renewal transacts much more efficiently than $1 of new and expansion. So when your mix is going to be more renewals, it helps with leverage and efficiency. So those are sort of the dynamics around renewals. But I will also say that -- and we said this when we gave out our guidance for this fiscal year, we're also expecting our new and expansion performance to improve this year, right? Because we are continuing to drive more discipline. We have initiatives that we're driving in the field, plus some of the vectors we talked about like the VMware Broadcom situation in the market and our Cisco partnership, et cetera, also helping with some benefit on the new and expansion piece.

Is there a similar -- can we do -- or try and build out like what are the building blocks when thinking about net new ARR. And where I'm going with this is like if you have $100 of net new ARR, how much is increasing contribution from existing customers, how much is from new customers? And within the existing customers, how much of that is coming from maybe attached to newer products that Nutanix is bringing to market? Again, like I'd -- broad brushstroke, sorry, end of a long day. But how do we break down that composition of thinking about that new ARR?

Yes. So let me try and do it -- give you some maybe quantification and maybe not exactly the way you were asking it, Mike. And then I'll answer the second piece more qualitatively. So on the quantification piece, let's just take our last full fiscal year end, fiscal year '23, July '23 year-end, where we said our ARR grew about 30%, okay? Now if you think about the building blocks of that to use your terminology, we have said our GRR is 90-plus percent, okay? So we haven't given a specific number, but it's 90-plus percent. We said our NRR for that period was 123%. So when you think about the 123%, it says we had let's say, $100 of ARR last year, a year ago for that same customer base, today, they are purchasing $123 worth from us after factoring in people who might have reduced their spend, right, or dropped off? That's the 123% from an expansion rate perspective, net of churn. And so the delta between 123% and 130% and the 30% growth that I talked about is now largely new looks, right? Because those are folks that are now coming in that weren't purchasing from us. So they weren't in the $100 last year and so -- but they've also helped our ARR growth over the course of the year. So that's sort of a quantitative breakdown of how to think about those components. Now within the 123%, I think that's your second part of your maybe question, which is we have talked about 3 vectors that we have there to drive that expansion. And we haven't broken out the numbers there, Mike, so I'll give the qualitative answer. The 3 vectors are, one is more of the same, right? So meaning you had purchased from us, let's say, a virtual desktop solution. And you want the exact same solution but just more, you want more users. So you went from X users to something greater than X. So that would be one vector of expansion. The second one might be a new workload in that -- sticking with that same example, right? Like you had bought desktop infrastructure solution from us. That was your workload that you were running in our platform. And now you're adding a Gen AI workload or you're adding a collaboration software workload or some other database workload. So that would be second vector of expansion. And then the third vector is selling more of our portfolio. So typically, people would purchase our core Nutanix Cloud Infrastructure Platform. But then they may add our Cloud Management Solutions. They may add Nutanix Unified Storage or Nutanix Database Solution, right? So that would be the third vector. So more -- buying more of the same, more workloads and then more of the portfolio. Those are sort of the 3 vectors. And we haven't quantified those, but to give you a sense qualitatively of how that 123% comes about, it's through these 3 vectors.

Okay. Well, just wanted to try for it. But no, I know with that, we're at time. But I really do appreciate the audience for attending and to the Nutanix management team, Rukmini and Rich, thank you very much. I really do appreciate it.

Thank you so much for hosting us, Mike, and thank you for joining.

My pleasure, Mike. Thank you.

Take care. Bye.