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

Good afternoon, everyone. Welcome again. Back to day 1 of BofA's Global Tech Conference. Delighted to have you all here. I'm Wamsi Mohan. I cover IT hardware and supply chain here for the bank and happy to welcome Nutanix. On our stage today, we have CEO, Rajiv Ramaswami. We have also Rukmini Sivaraman from -- who's the CFO. And both of you, you kind of had a tremendous run, actually, at Nutanix, all sorts, right? Like, you've come in and you really changed sort of -- a lot of things you put into motion that have helped the company achieve sort of this new direction, and we're excited to have you here, so welcome.

Thank you, Wamsi. Thanks for having us here.

Yes. Absolutely.

Thank you.

Well, there is a lot to talk about, but I think the #1 thing that people are -- have been kind of focused on is the change in the marketplace because of what has happened with the acquisition of VMware by Broadcom. And you spent a lot of time at VMware, Rajiv.

Yes.

So you have some real perspective here, so would love to hear sort of what has been going on in the marketplace because I think people have -- obviously, this presents Nutanix and would love to, like, hear your characterization of the opportunity.

Sure. So I think Broadcom has made a number of changes after they closed the acquisition and largely following the playbook that they've done with their other acquisitions in the space. Now what that means for customers, companies around the world, VMware has about [ 100,000 ] customers or so. Of course, concentrating, there's fewer larger customers there, but they have to look at their risk and they have to look at whether they want to be long term with VMware going forward or not. So that's opened the door from a pipeline perspective. Now if you look at -- if you're a VMware customer and you're looking at what to do, I would say there are 4 options: You stay with VMware and at that point, you have to deal with whatever pricing you have to get and whatever support you can get and whatever roadmap is going to show up or not. Then you've got Nutanix. We are an option. You can go into a container platform and containerize all your applications or you can look into public cloud. I think those are the options. And all of them require some work for the customer. But of which, the Nutanix platform is the easiest migration outcome. Everything requires some migration, but the Nutanix platform can run all their existing applications, pretty much comparably to VMware without requiring any changes in the application there. In other words, it can be an underlying infrastructure change. Everything else continues. It doesn't have to be difficult, right? But as -- if you've got it containerized, you've got to go then take good developers to work on it. And in a lot of cases, there's no other value containerizing an existing application. There's a lot of value in building a new application as containers. So that's more work. Migration in the public cloud is also more work, right? So those are the options in front of customers, and we've seen clearly, as a result of that, a significant interest in terms of pickup from customers interested in engaging with us. Now, I think, when you get to the reality of what this looks like, we've always characterized this as a long-term multiyear tailwind. And the reason is, first of all, many customers have multiyear deals already in place with VMware, so that takes time for them to -- they have time, right? They don't have to go do something tomorrow. In fact, many of them signed 3-years on day deals or 5-year deals just before the acquisition closed. The second is, in most cases, a migration out of VMware to Nutanix, the platform requires a hardware refresh. And so this also then has to do with, okay, when is my existing hardware going to be depreciated off my books and when can I afford to go buy new hardware. Then, of course, they have their own budget cycles and they have their own priorities and so forth, right? So these things take time. And I think that's why we say this is a long-term multiyear opportunity for us. The good news is that we have -- we know how to do these migrations. We have been doing a lot of these over the years. In fact, we had our .NEXT conference 2 weeks ago, where many customers were up on stage talking about their migrations and how they have migrated off, so happy to give you a very specific example, if you'd like, but several of them are pretty vocal. And it kind of also depends on what they were migrating from and where to. One example I talked about publicly, the CIO of Computershare was there, talked about -- they're an enterprise company. They do all of these, what I would call, all the stock transactions, right? And so for them, they're doing a full-scale migration out of VMware into Nutanix. And they have to complete that in a year. It's a medium-sized environment, the way we put it, 24,000 units is what he's talked about. And they're going to do this all in a year. But -- and there, I think they're pretty clear who they want to do business with and so forth. But it's not so clear cut for a lot of other customers, right, who have perhaps more complex environments, who have these other constraints that we talked about, which is why I come back to say it's a long-term thing.

Yes. How should we dimension the size of this? And when you think about the opportunity ahead of you, how would you segment that by -- I mean, I think VMware -- or rather, Broadcom has historically had a focus on, like, top 500 customers after doing a deal, right? So how would you characterize sort of the TAM at those top 500 and then beyond the top 500?

Yes, those are both very good questions. I'll give you somewhat qualitative color. But on the TAM first, overall TAM, look, we've talked about us being in a $7 billion to $6 billion TAM. A good majority of it is what I call 3-tiered, so which means service -- virtualized servers connected to third-party storage. And we've been eating our way into that and displacing like [ SE ] architectures. And I think what this particular transaction will do, from a Broadcom-VMware perspective is help us further accelerate our conversion of some of those opportunities. That's the way I look at it overall, right? Now I think, again, if you sort of dive down into the next level, I think if you look at the VMware installed base, the vast majority of it is actually 3-tiered. There is some HCI. And for the HCI portion, it's more for a like-for-like migration, although not 100% hardware compatible, but more hardware compatible than just left side, which is this big VMware 3-tiered opportunity. It's the 3-tiered opportunity the one that I think, again, like I said, takes the time and so forth. Now then, I think, the -- sort of the other thing is the complexity of the stack itself. If it's just a simple hypervisor, we can do the migration fairly reach fairly automated. If large customers have done a lot of integration on top of it, I think this is -- this takes more work and more proxy services work which we are happy to do ourselves or also work with our integration partners. Now going to the more specific large-versus-small kind of question that you asked about. So I think we have been recognizing for -- even prior to this Broadcom opportunity, that more of our TAM is actually the larger customers. And we have been filtering our go-to-market to go focus on those right? So we have a 3-tiered approach to our segmentation. Tier 1 being the top enterprise, Tier 2 being medium enterprise and going down to commercial, and then Tier 3 being smaller customers, and we've largely channeled that in the last year for us. While -- so in those larger customers, and we see a bigger chunk of the TAM there over time. And we have -- like I said, independent of Broadcom, we've been working our way towards that. And now I think the larger customers, generally, have more complex environments. And by the way, this is one of the reasons why we've talked about how our deal sizes have gotten larger, right, in the pipeline. And those larger deal sizes typically result in longer times to grow a bit some more variability. So I would say perhaps more of the TAM generally in the higher segment.

And when you think about -- I don't know, if we're reading too much into this, right, but as you look at the last several quarters, you've spoken about some of the macro impacts that have been a headwind for the business. I think last quarter, you definitely pointed out that there were some dynamic pricing that was taking place in the marketplace. Would you say that the competitive environment has changed or is evolving in some way different than maybe what you thought like 6, 9 months ago?

Four, 5 months is when Broadcom has made all those pricing changes. And I don't think it's settled down because, I think, those changes are where it's dynamic, right? They've announced a lot of things and then they're testing to see what's happening in the customer base. And of course, we -- as we would expect at that point, some of this is dynamic, and it's evolving. I don't think it's gone to a steady state yet. It's still early, right? So I think it'll probably take a few more quarters to get to a steady state.

But would you say that as part of that change of your thinking that either the TAM or your pipeline has changed in some way?

I don't think so. I think our pipeline has actually continued to grow. And I don't think the TAM is changing. If anything, I would say, again, we have been opening up more of the TAM with some of our recent announcements. For example, we just announced a partnership with Dell, where, for the first time, we are going to be supporting a third-party storage [ array ], which is a deviation from our typical HCI mindset with our high provider is a stand-alone entity. Now that opens up a bigger portion of the tab for easier replacement, because now this would be a drop in replacement for a hypervisor which are having to go to a new architecture. But I would also say that this is a smaller sale for us compared to selling the whole portfolio. So an easier insertion, opening up the TAM faster but getting to a smaller portion of the TAM and hoping to convert that over time as customers are willing to modernize and go to a newer architecture. So that's an example of how I would say we have been trying to grow our TAM.

Okay. That's helpful.

And if I can add something there, Wamsi. What's changed, I think, is that we have a larger mix of bigger deals in the pipeline, as we've talked about. That has changed in the last few months. And that, we believe, is also leading to this dynamic of just things taking longer than we had expected, right, when you go back a few months. So that's different, I think, today versus a few quarters ago.

Okay. I think, Rukmini, you've mentioned that your new and expansion ACV was tracking a little bit lower than what you expected maybe at the start of the year.

Yes.

In totality, your ACV billings have been very good. You've been also achieving in totality. So I guess, to reconcile those things, your renewals are obviously doing quite well. Last year, you had a lot of co-terming that kind of drove this uplift in renewals, so how should we think about this year or next year in terms of progression of relative to maybe what you had laid out at Investor Day, how these renewals are tracking?

So de novos have outperformed our own expectations from the beginning of the year. And we've said that's because of 3 reasons: So one is better economics at the time of renewal, and we try to be reasonable about this, but the team has executed well in a more disciplined way, so that's helped us; second is better on-time renewal performance than we had expected; and the third piece is what you alluded to, which is more early renewals and core terms than we had predicted at the beginning of the year. And then to the third piece, specifically, to your question, Wamsi, I think early renewals, we view them as generally a good sign, right? The customer -- often it's customer-driven because they either have a budget reason to do so or they know they're going to renew on Nutanix, so why not go ahead and do it. We typically get the cash up front. But the revenue is typically at the time it's due, right? So I want to point out that nuance, but we welcome those, especially if it's a good economics, right? So we don't want to give away value to get in early. But if it's coming at good economics, the customer is happy, we're, of course, happy to retain them. Now we did have some of that last year as you pointed out. And what we had said was if you look at our available-to-renew pool, ATR or think of that as a renewal pipeline, we had said that, that is expected to grow in '25, let alone '24, and grow at an accelerated growth rate. Based on our current view, that is still the case. We didn't comment on the magnitude with relative, but we did say that some of the outperformance this year is because of early end quarter. So in general, we think that's a good thing, similar on the core terms. Customers like it because now they're converging all of their dates into one simplicity for them. It's simple for us because we're doing fewer renewal events then for our renewals team. So that, too, is something we like. But those can be harder to predict because the customer has to have the budget, right, to go and core term a bunch of things. So yes, overall, I would say, I think our renewals business, in general, provides a good foundation for us. It's more predictable, of course, given we have -- our GRR is quite high. That it's more predictable and allows that -- a nice foundation for our billings.

If I could follow up on one of the things that came up in the quarter was that you got this OpEx benefit from a partner payment. Can you elaborate on what that was specifically? And maybe provide some color around that?

Yes. What we said was we are getting about a $40 million benefit in OpEx, as you said, over the course of this year. We expect that to be nonrecurring, so not expected to recur next year. That is in the R&D line. And so we didn't name it related to a partner. We said we didn't name the partner, Wamsi, but think of that as -- it's in the R&D line, as you can imagine, and think of that as sort of a joint development that we're doing with one of our partners, and so we're getting compensated for that. So absent that, our R&D would have been $40 million higher this year. It's how to think about it. And therefore, next year, that is -- would be a headwind for us going into next year.

That's a pretty unique arrangement of sorts, right? Like, I mean, you must love that kind of arrangement, but -- that you're getting to get this nice, like, investment...

I mean, I think -- look, I mean this is onetime, right? I mean it's not something that recurs typically or something that we typically do all the time. It's a symptom of how well we're doing with one of these partners.

Yes. When you think about the opportunity here, right, like, in some ways, when you look at the Cisco opportunity for as an example, right? Like, that is interesting, but in the scheme of, like, your TAM, it's actually not that big in some ways, right? How -- would you agree with that statement? And where would you say sort of the partner opportunity can be a lot larger? I have a name in mind, too, but, like…

Well, let's talk maybe about Cisco and…

Yes. Okay.

Probably that was the other one that you have in mind, for sure.

Yes, that's the other one. Yes.

Yes. So look, Cisco, I think, obviously, a big company, a great company. I've worked there for many years. And their footprint in the server space is small, relatively. Their market share is small. They also have a HyperFlex installed base, which is their product in the space that we are in. They have since end-of-life that product, and they're reselling our product. So the opportunity with Cisco, I classify as twofold, okay, one is, of course, replacing their HyperFlex installed base with our product. That's sort of -- but that's a small number, relatively speaking.

Right.

But the bigger opportunity is Cisco has commanding sales presence across so many accounts globally. And they also tend to do much larger, sort of bigger solution sales. And to the extent that we can be part of that, to me, the opportunity is -- the bigger opportunity is not the HyperFlex installed base, but it is the ability to capture new customers at a scale that would be accelerated for us. So that's the promise of the Cisco relationship. What we've seen so far, it's still early days. They are ramping up with their sales force. Their services are compensated fully and attached with a Cisco product. And we've seen some good new logos come through. But the numbers are still small for this year, as we indicated when we got into this relationship, and we expect it to be a bit more significant for us in FY '25. So that's Cisco. And the good news with Cisco is while the share is small, but they're all in on this. More recently, 2 weeks ago, we announced our partnership with Dell on an expansion of our collaboration with Dell, I should say, because we've been working with Dell for a long time. And there are 2 elements to that collaboration. The first is Dell is also going to be reselling an appliance with our software on their server, HCI clients. And that will be available to the market later this year, okay? And to be fair, our software already works with their hardware. Customers are just buying them separately and putting them together. Now Dell will sell them a complete offering and their service will also be compensated on it. Now from Dell's perspective, I look at this the same. Again, I would expect that -- Dell sells their own storage, right, so clearly, their own products. And then they have options from us and option from VMware. And so they'll probably be able to offer choice in the market. We, of course, have a large presence in the market, but we are going to be one of many offerings that they have in their portfolio. And then the second part is this, I think, we covered this a bit, standalone high-provider. They'll come to market only sometime next year in 2025 and won't have -- it may -- will start impacting revenue, perhaps positively, in FY '26.

Yes. But on the HCI opportunity with Dell, it's actually a fairly large opportunity given sort of their market share because, I mean, you have obviously a significant market share in that, too.

Yes. Certainly, I mean, I think it's certainly a positive for us, right? And of course, we have a significant market share ourselves in that market, and I think Dell could help accelerate that. But again, I just want to bear in mind that Dell's got lots of choices. This is one of many that can be bought. But we're glad that Dell is now able to go sell it and have a full-pledged offering based on Nutanix.

So full 18 minutes have passed and we haven't mentioned the word AI yet, so we got to get there. Maybe talk a little bit about what your GPT in-the-box solution is and what are your expectations around that.

Yes. I think Enterprise -- if you look at AI today, a lot of AIs and pairing large language models and massive compute clusters are largely in either in the hyperscaler or in specific GPU clouds. The Enterprise journey is just starting with what I would call enterprise AI. And that is about running AI where their data is and really using it for inferencing for specific needs. And so far, I would say that's very early stages. But companies have to run AI wherever the data is. And of course, some of the data will be in the public cloud, and they can run the -- both the training and the inferencing right there, but a lot of the data is not. And also a lot of data is being generated outside of the public cloud in terms of the data that you need to do inferencing on. And for that, again, therefore, your AI has to run where the data is fundamentally and data gravity has a big impact on your AI algorithm. So we think there's a significant growing market, over time, for running enterprise AI in a secure private setting that protects your data, your IP or company data and the company's IP. That's what GPT-in-a-box is for. And what we do with that is, very simply, provide a turnkey platform for companies to run their AI applications without having to worry about all the nuts and bolts of what it takes to get that set up. So it's our infrastructure platform, the same infrastructure platform. We integrate a number of the ML operations tooling that's needed. And with our most recent release, GPT 2.0, which I'm quite sure with the general announcement we made 2 weeks ago, we integrated a lot of the workflows and enterprise-grade security, access control, to help a customer go to a well-known repository, either a Hugging Face or an in-media repository, download a large language model of their choice, whatever it may be, LLaMA, Mistral, whatever they like. Connect it and tie it to the infrastructure end point, which is running GPU, our software platform running on a server with GPUs. Automatically tie -- all the workflow is automated and then provide an API, standard API to an application. So it really becomes a turnkey platform for people to run their AI applications. And it's early days for us, but the whole -- it brings this whole notion of simplicity. We want to be the platform for modern applications for companies. Of course, today, we're already a platform for all their VM applications. For our future, it's all about modern applications and being the platform for that and modern applications, largely, are going to be containerized. Just probably going to be a doubling of applications in the enterprise over the next 3 to 4 years. And a lot of the new applications are going to be continued applications, and we have a platform that runs them very well. In fact, we announced our Kubernetes portfolio at our .NEXT conference 2 weeks ago, and it's a 3-part portfolio that allows, at the end of the day, companies to build a container application, run it in a multi-cloud environment, wherever they'd like to run it, along with a set of data and platform services that make these applications truly portable. Build once and run it anywhere. And so we are excited about that as a future direction. And of which, AI is a great example of the most modern of modern applications, right, which -- it has all those attributes, right? It's -- most new AI applications are Kubernetes-based, containerized. They need these data services. They have a lot of data that they have to manage, and so it fits that bill perfectly.

Yes. Yes. We had hosted an earlier session with Red Hat CEO, Matt Hicks.

Matt, yes. We're friends.

Yes. And he was very complimentary of the Nutanix partnership.

Thank you, Matt. We are complimented we have that partnership, too.

What would you say the opportunity there is for Nutanix?

Yes. I think again, we are largely complementary with some overlap. But if you look at customers, they can deploy a Red Hat OpenShift platform on top of a Nutanix platform. And Red Hat has a full stack for developers -- facing developers for them to build these applications. And then we have a platform to run all these applications and manage them. And both of us have a view of being hybrid and multi-cloud. We also have a vision of customers being able to run these applications wherever, right, in any platform anywhere and it fits the vision. And we can also complement the Red Hat offering with our data services offering quite a bit, and our ability to offer a consistent set of storage services that will enable companies to build these more complex modern applications, run them anywhere. So we have that. That's complementary. The platform services that we have, starting with our database service is also very complementary to what Red Hat has. So together, of course, our platform is quite powerful for the enterprise.

Yes, absolutely. Maybe just switching a little bit to free cash flow, Rukmini, I think you alluded to some onetimes that have been a benefit to free cash flow in this fiscal year. How should investors think about the quantification of that? And what is the implication of that to next year's free cash flow?

Yes. So I'd say what I can now. We haven't guided, as you know, Wamsi, and so we'll do that next call when we guide our full year fiscal year '25 free cash flow. So this year, we're really happy on our last week's call to be able to raise our free cash flow guidance by $100 million. And we said a few things about that. One is we did book this fairly large, unusually large for us, 8-figure ACV deal. It was booked in Q3, but it will be built and expect to be collected in Q4. And as you will recall, we collect all of our cash up front, even for multiyear contracts. So that was definitely a significant factor in our ability to raise our free cash flow number by as much as we did. And then, I think, the second piece that we've talked about, to your point earlier on the partner payment, the $40 million that's in OpEx, about $30 million of that is in free cash flow as well as a nonrecurring payment. So that's the second piece we called out. And maybe thinking about next year, the one other additional comment I will add is if you think about our expense profile over the years, if you go back fiscal year '21 to '23 and look at our OpEx number, they were more or less flat. We really chose to keep it there while we completed some of our subscription transition and things like that. And in '24, this fiscal year, we made a deliberate choice to invest, to start to invest more, and you can see that in our implied operating expenses, even though we're taking margins up quite significantly, actually, both on free cash flow and operating margin. So as a result of that investment, we have hired people along the year. And all the folks that were hired in the second half will all be full year next year, right? So that, from a run rate perspective, you should assume that our starting point for '25 is higher than it was in '24. So that's the other piece that I'll say that folks should keep in mind. And maybe more generally, our overall philosophy and Rajiv and I was very aligned to this, but our overall philosophy is on driving towards a sustainable sort of rule of 40-plus company. I think you've seen us make significant progress towards that over the last few years. So that philosophy itself hasn't changed. And more generally, our investment, we have to sort of balance this idea of anything that we invest will take a little time. Will it pay off? So we have to keep that in mind and try to balance that which is responsible. On the other side, we don't want to invest late that we miss something, right? So we're balancing those 2 in the midst of our '25 planning. So that's how we're thinking about it. AGAIN, with this longer-term idea of being consistently rule of 40-plus company over time.

I know you haven't guided fiscal '25, but as we think about this kind of OpEx step up, I mean, if I was to -- if I'm interpreting what you're saying, right, you're also saying that some of this investment doesn't really pay off necessarily in '25. It's going to take -- it's a longer-term investment that takes a longer term to pay off from a top-line growth perspective, whereas some of the investment has to be done earlier in time.

There's an element of that. And we're trying to balance that with our overall philosophy, which has been, generally, right, like we need to get to this rule of 40 consistently, so. Yes.

I just think that I think you should expect that we will continue to be disciplined in our investments, continue to drive both growth and profitability. And like Rukmini said, rule of 40-plus. And it's the nature of our business, right? Anything that we add in terms of investment takes time to -- that's just natural. And it's just part of our overall planning process.

Where is the investment specifically directed to that this sort of, let's say, incremental sort of investment that you made this year?

Yes, so I'll -- maybe I'll comment on it. It's largely, of course, most of our investments is either on the product side R&D or on [ the pit ]. So on the R&D side, I think we have -- again, as Rukmini said, we've had an OpEx platform quite a while, and we think it's time for us to invest and become -- we are here to win, right, and we want to be the platform of the future. So certainly, in terms of shoring up our core, first of all, doing more with the core to enable opening up of a broader TAM, that's something, I think, we're able to do now, and we have the opportunities that we're doing some of that. And we announced a lot of this at our .NEXT show. And they're really focusing on the future, becoming that platform, right, the platform for all applications, including the most modern applications. Being a multiproduct platform and being the platform for running AI applications like GPT-in-a-box 2.0 so -- and continuing to invest in growing the partnerships. So that's -- a lot of the R&D incremental investment is focused on that. And most of it is organic. We do, do some tuck-ins. Like last year, we did a tuck-in of D2iQ, which processes Kubernetes platform right, so that's part one. Part 2 of the investment is, of course, in sales. We want to capture these opportunities that's out there. We have been moving further up-market. We have been going aggressively after this VMware opportunity that's out there. And we are seeing the -- I would say, the signs of the pipeline there. We've seen the fact that with our portfolio, now we can command these deals like an 8-figure deal, right, with the Fortune 50 company and deliver a lot of value to these big customers with complex environments. So we are investing from a sales perspective as well. But again, all in a moderated way to line up with this notion of both growth and profitability.

The one additional area, if I might add, is around awareness. So we've talked about this from a marketing perspective, because we talked about how VMware in some basis and so on. And we are smaller, but we think, to Rajiv's point, where your wins, we want to make it as awareness in the market, so we have turned up the volume. And some of that incremental investment has gone towards marketing campaign and brand awareness and things like that, which we think is important to have that mind share.

Is there -- what else needs to be done, Rajiv, to maybe think about the largest of VMware customers? These are fairly complex environments, fairly large-scale environments. And a lot of these customers have never thought of dual sourcing in some ways. So is there -- what else does Nutanix need to do to really say, we are -- we can credibly migrate you off of VMware at, like, scale? At a larger scale maybe?

I think we've actually already proven that, right? So we have been doing these migrations for the years, and we've automated a lot of the simpler migrations. And for the more complex migration, we have services. But at the end of the day, I think we've earned our trust to be a partner at the table. We have about 1,000 of the Global 2,000 as our customers already. Now, I think, the biggest change that we are seeing is we typically would land in a small portion, and we would expand afterwards. But now I think with the portfolio that we have, we can capture a much bigger portion of their wallet share. And we are doing that. I mean, we don't do a lot of 8-figure ACV deals, right? But we did won and this was our land deal. This was the initial deal with a 40, 50 company. And there is -- again, this is not their full wallet share, right, by no means have we tapped it out. And this particular company is only using us for database workloads, one workload really. And we have room to expand, right, on top of that. So I think we've earned that trust to be at the table. We've also honed our go-to-market engine in terms of having deal-pursuit teams to be able to go after these larger deals that include cross-functional, executive sponsorship sales, cloud economists, product and finance teams that work together to go drive these deals.

Yes. Well, that's excellent. Unfortunately, we're out of time. 30 minutes is just too short to cover so much. But Rajiv, Rukmini, thank you so much for joining us.

Thank you, Wamsi. Thank you.