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

Okay. We can just get started. It's my pleasure to welcome Rajiv, President and CEO of Nutanix and the Rukmini CFO of Nutanix. My name is George Wang. I'm the IT hardware analyst at Barclays. Maybe just to start off, kind of give an overview, Rajiv, can you kind of talk about top takeaways from the fiscal 1Q earnings and the kind of long-term opportunity set for Nutanix?

Yes. I think, first of all, our earnings we came in above all our guided metrics, and we were also able to raise our guidance for Q2. And so we had a good quarter. We're feeling good about our future as well. And if you look at our outlook in FY -- I mean, the rest of the year and if you look at calender '25, overall, I'd say, if you look at it, I'll sort of give you 3 dimensions of it product, go-to-market and financial. On the product side, we are continuing to invest in our core portfolio, supporting hybrid cloud, modern applications, AI right? I mean that's our core focus. That's what we're continuing to invest in. And that's what customers want. Customers are wanting to modernize their infrastructure, go to public cloud, selectively figure out how to modernize and run these new applications, including AI top of mind for a lot of companies in our space. So that's the first thing. The second thing is, very selectively, we have -- we're also starting to cover the ability to work with external storage, which is a new thing for us as a company. I'm sure we'll probably cover more of that here. So that's the second thing that we are hoping to get done starting in the first half of calendar '25 with early supporting the first set of these storage arrays. On the go-to-market side, we continue to grow our top line here, focusing on top line growth by multiple vectors there. one, overall, we have added more resources to our go-to-market team over the last year. They're starting to come up to speed, ramp. And of course, we expect to see increased productivity as a result of all of that. Selectively, our strategic OEMs, our relationship with Cisco, Dell and AWS, which we expanded more recently, continue to invest in that, continue to invest in our channel partners. And then all of this from a financial outlook leads to continued focus on both growing the top line while sustainably and we say sustainable profitability, continue to grow, expand our free cash flow.

Great. Just from a high level kind of can you talk about where we are in the sort of macro and the demand cycle. I mean, obviously, you guys talk about -- some customers may continue to sweat assets and you have modest sort of elongation of sales cycle. So heading to for the rest of FY '25, maybe you can talk about the guidance as regard to how well the macro evolve in your mind?

Rukmini?

Yes. So I'll start there. George, thank you for having us. First, it's great to be here. Thank you for hosting us. So on the demand and macro environment, we've talked about, as you said, this modest elongation of sales cycles for a few quarters now, and we saw that continue in October quarter as well. And when you think about our revenue guidance, we've assumed that it will stay more or less the same. So we're not assuming a dramatic improvement or worsening at this point. We think anything that happens will be more gradual, if it does. So we assume that continues. And then some other macro things to think about for us specifically, this is not so macro related as it is out to our revenue guidance. But we've also talked about the fact that we have a growing pipeline of opportunities. But that there's a greater mix of larger deals in that pipeline. Now a lot of it is by design because we have chosen to go up market and go after where more of the market opportunity is. So that's good. What does that introduce though is more variability in terms of when those transactions might land and convert into bookings and into the financials. So that's also baked into our overall revenue guidance. The one last factor I'd say more from a macro basis is there's a new administration taking office here in next month. And so TBD on how what they would choose to do and at what pace. So that's another reason as we thought about our full year guide, that introduces some level of uncertainty as we think about that.

Thank you. So when I look at the Nutanix story, arguably one of the biggest catalysts is continued VMware displacement opportunity. And arguably, it's multiyear's material, but could vary quarter-to-quarter. So maybe, Rajiv, you can give a refreshed outlook and the current status in terms of the opportunity set related to the acquisition disruption...

Sure. The first thing I'll say is for -- even before the Broadcom VMware acquisition happened, I mean, we've always been focused on continuing to displace legacy infrastructure with a modern cloud like hyperconverged infrastructure that works on-premises, but also extension of the public cloud. So that fundamentally has not changed. What's changed, of course, is now we have more and more customers being a bit dissatisfied with what they're seeing with respect to VMware's ongoing interactions with them, whether it be price changes, whether it be potentially long-term innovation and the support that they could get. So we've always characterized this as an increased opportunity for us to gain share in the market. But over a long period of time because infrastructure tends to be fairly sticky. There's multiple factors that come in the way as customers adopt the alternative solutions. We believe we are the best alternative for customers looking to migrate away from VMware. Most applications running on a VMware platform, we can support and run assets with great performance. And in fact, if they're running on a legacy infrastructure, which is a lot of VMware running with 3-tier storage. We can typically run it even better in an HCI environment. So we can do that. The migration is relatively easy compared to most other alternatives out there because the applications can be run assets without requiring any modifications. Now from a time perspective, there's multiple gating items that come into play, which is the timing of the VMware license renewals, the timing of their hardware refresh cycles and the overall customer sentiment. One sign of what you're seeing in the market as a result of this is, if you look at our new logo count, it's been on a steady climb up year-over-year for the last few quarters, and we expect that to continue as well.

Yes. So if you double-click on the VMware displacement, maybe you look at SMB versus larger kind of accounts and you guys talk about in the pipeline, you're seeing a larger mix of larger deals. So can you give more color in terms of different segments, how you approach on a relative basis?

So I'd say, first of all, the larger mix is not just driven by VMware, right? It's driven by the fact that, look, the top 10,000 customers represent maybe about 70% of the available market, okay? And so we recognize that for a long period of time. And over the last several years, we have been tilting our focus to serve those customers, both from a product readiness perspective as well as our go-to-market focus, right? So that's one of the reasons why we've seen that. Now if you look at sort of how this plays out across, the new customers that we are winning, by the way, are across both large and small. It's almost proportional in terms of our ability to capture big ones as well as small ones. Those bigger customers, of course, will lead to larger deal sizes, right? And large deal sizes inherently tend to take longer, inherently have more unpredictability in terms of timing and what the outcomes are. And that's one of the things we mentioned in our past calls to say, look, that portion of larger deals, deals over $1 million ACV for us has been going up. And therefore, that adds a little bit more uncertainty in terms of timing and so forth. With respect to the migration itself, I think, again, larger customers have more complex migrations, smaller customers, easier, faster migrations.

Got you. So if you look at the data center landscape, you have more to HCI, but a large majority is still resides like 3G infrastructure. So what's your pitch? So what's the value-add Nutanix can bring to table to further the share game versus the legacy 3G infrastructure?

So if you move from legacy 3-tier to HCI, you get a cloud-like architecture with automation, that is suitable for you to run not only today's applications, but also all the new applications that are coming on board, whether it's containerized cloud native applications or AI applications. We can run those better, more efficiently, drive about 40% to 50% total cost of ownership production, help you run this entire environment at scale with automation, with a lot fewer people than you would typically need otherwise with legacy infrastructure, and provide you a consumer-like experience so that these people who are running the infrastructure are no longer -- they don't have to be trained specialists, they can be actually relatively young and carry a talent and a lot fewer required to run much larger infrastructure. That's a value proposition.

Thank you. Maybe we can talk about renewals. Obviously, that's one of the most important attributes, because that's lower cost. And you guys talked about acceleration in the renewal for FY '25 versus last year. So maybe you can give us some background kind of update in terms of where we are in the renewal cycle and how does the renewal sort of play into expanding sort of cash flow and operating margin?

Yes. So renewals, as we've talked about before, George, and I think is what you're alluding to, has been a growing base for us over the last few years. And as a reminder to folks, we switched our business model into a subscription term license-based model a few years ago. And so that's what's allowing us for the renal cohort to grow, plus, of course, the more land and expand incremental business we sell, that also starts to flow into the renewal cohorts over time. In terms of -- sort of the market between top line impact and bottom line. So on the top line, renewals is great because we know when the licenses are coming due. We have -- we know that because when the contract is coming up for renewal. And we have a high degree of confidence in our ability to actually close those because our GRR rates, gross retention rates are strong. And so that provides good visibility and predictability when you think about the top line, both from a billings and a revenue perspective. So that's good. Now when you think -- I think your point about leverage to the bottom line, the renewals do transact much more efficiently than land and expand, as I think is the case for most companies. So for us, as the mix of renewals continues to increase from a billings and revenue perspective, that drives leverage in the bottom line. Now specifically on your point about Renault cohort size, we talk about something called an available to renew or ATR pool. Think of that as just ACV that's coming from the renewal base. We said that, that available to the new pool in '25 is growing relative to '24. And previously, we had said, George, that the rate of growth is higher in '25 than '24. But as we guided to this year, some of this timing can move around. There were some that closed in '24 already relative to '25. So now we expect that '25 renewal ACV or ATR pool is going to be growing at a similar rate relative to '24.

So maybe a quick follow-up for you, Rukmini. Just to what view as the biggest headwind for renew acceleration this year, if we were to take a step back and we talk about timing, maybe some larger deal variability maybe you can be...

It's really just timing, right? Because like I said, these are not -- these are opportunities that we've already closed in the past and the customer is purely coming up for renewal. So it's not -- this is not necessarily new pipeline. The pipeline is deals we've done before. So it comes down to timing. And often, it's also our team has gotten much better at execution in terms of economics and making sure we're getting -- we tend to charge inflation like adjusted price increases at renewal, but also if the duration comes down, so it was a 3-year transaction, but it's a lower duration at renewal. Then of course, the longer the duration, the customer gets a better price from an ACV perspective, right? But the team has gotten a lot more discipline and execution around that. So it's -- and then there's core terms, which is when we think about a customer that has maybe a larger estate and multiple end points in terms of when their licenses are due, we and they often prefer to have a [indiscernible] terminus. So that it's easier. We have fewer renewal events, right? Those are the sort of 2 or 3 factors that drive renewals, but the -- but as of now, renewals are doing well, right? And one of the reasons for outperformance in the October quarter was good renewals execution.

So shifting to lender expand. Obviously, you guys are champing kind of cross-sell, upsell across different platforms, kind of higher attach. And how should we discount this opportunity set within the context of FY '25?

I can start on Rajiv, and you are welcome to add to it. So I talked about how renewals is a nice foundational driver of growth in sort of billings and revenue. It is an ARR as well, right, but it just has maintain ARR, right? It protects the ARR installed base. When we -- the more renewals you do the better it is from a protection of ARR. And then what grows ARR is any kind of incremental economics to get on the renewal, but the bigger chunk of it clearly is the expand fees, which is selling more to our existing customers and the land, which is landing new logos. So we've talked about how our -- Rajiv mentioned earlier, that our new logo additions have grown in the last few quarters, which, again, we put a lot of effort into that. So that is starting to pay off which is good and you see that reflected in the guidance. And then on the expand piece, we had some challenges in the October quarter, mainly largely due to the U.S. Federal business which we can talk about more of that's helpful. But -- so that's one of the things, and we are doing more work to make sure that they expand -- to work on the expand business. For example, we have hired over the last 6 to 9 months more portfolio sellers, meaning these are specialist sellers who are going to help us drive more attach rate of our broader portfolio, which their focus will be therefore largely on expand and then where we can get new customers also we'll be adding to the portfolio there, right? So we're doing some things there, but more work to be done on expand.

Rajiv, do you want to add?

No, think she covered it.

So yes, that's going to settle into the federal business. Obviously, the 1Q against a tough comp slightly softer. But heading to 2Q is encouraging to talk about normalization in the federal business. Can you give us a quick overview of dynamic, how it plays out and maybe in the fiscal second half, you may have not as greater visibility, but that's been factored into the guidance?

Yes. I think, look, our federal business is dependent upon a set of programs that we've designed into and some more discretionary project-based spending. And a lot of these have been subject to these continued resolutions from a budget perspective over the last year. And what we saw this last quarter was that the programs that we were in and the projects that we were in, did not spend much, right? So -- and that resulted, of course. And this is the biggest quarter for the Fed, Typically, it's their year-end. And usually, we have -- this is our strongest Fed quarter. And of course, we also had a tough compare from last year because last year, at the same time, we had a great Fed quarter. So this year, the net-net of it was -- Q1 was down for us in Fed year-over-year -- but the good news is that we do expect Q2 to be back at normalized levels, right? So we know the programs that we're in, we know the project there in and we have visibility into the pipeline for this quarter, and we feel good about it coming back to what we call seasonal normality. It's still -- Q1 is still the big quarter, but Q2 is back at seasonable normality. Now when you look at Q3 and Q4 for us, which is really the first half of next calendar year, really after January, I mean there, of course, there is uncertainty because you've got the new administration coming on board. And of course, they have [indiscernible] and there's all kinds of talk about how the government could be slimmed down, there could be cuts there. But along with cuts might also come -- potentially, there could be acceleration in tech spending because tech spending is a way for making these departments more efficient too. So it will be speculation on our part. We don't exactly have visibility into what's going to happen after the new administration comes on board. But that's one of the cautionary reasons why we did not feel it's prudent to increase our revenue guidance for the full year, right? We were comfortable raising it for Q2. We got good visibility into Q2. But from a Fed spending in Q3 and Q4, it's hard to predict what might happen.

Yes. Maybe we can double-click on the partnerships. Earlier when you guys talk about long term and the medium-term opportunity set, you talked about the OEM partnerships and some channel support, including the latest Amazon Web services with Cisco obviously and they are PowerFlex. So maybe we can start from the expanded AWS partnership and C2, also kind of relates to earlier, you have as or -- so can you talk about kind of your sort of value proposition, both on-prem but also extending to the public cloud?

Okay. So fundamentally, we've had our public cloud offerings in the market for a few years now with both AWS and Azure. And the value proposition very simply is exactly the same software stack, the same licensing, which is also completely portable, running both on-prem or in the edge and in the public cloud on bare metal on top of AWS or Azure. The value proposition from a customer perspective is that first, one team can operate this entire infrastructure using one set of tools. Second, workloads and applications can be easily moved, right, automated moves, from on-prem to the public cloud or vice versa, giving you a lot of flexibility in terms of dealing with -- whether you want to go do a geographic expansion or disaster recovery or temporary capacity expansion. So that's been our value proposition. Now the specific enhancement of the partnership with AWS was trying to accelerating cloud migration into AWS. One of the driving factors for it was the fact that VMware had a cloud offering on AWS, which AWS are no longer allowed to resell post the Broadcom acquisition. And we believe that the focus from a Broadcom perspective is different now than it used to be before on that particular offering. So many of the VMware cloud customers on AWS are looking for an alternative, and we are working and partnering together with AWS to provide this easy migration path. AWS as a migration acceleration program that provides incentives for our customers migrating from those VMware infrastructures over to either native AWS or to NC2, which is our offering on their platform. So early days, we just announced it recently. And we talked last quarter about our large universities that have actually done this migration. One of the nice things about this particular migration is it's actually quite easy to do, same hardware. It's very easy to migrate those VMware workloads running in a public cloud onto a Nutanix platform in the public cloud as well.

Just shifting to Cisco, obviously, Rajiv, the down loan for a bigger sales force, a bigger channel but maybe obviously, the kind of revenue accretion takes time. So maybe for FY '25, it could be modest, but it could expand over time. So can you kind of double-click on the Cisco partnership?

Yes. So first of all, I think Cisco is a very clean relationship with the sense that they don't have other products that compete with us in this space. And of course, I have a lot of respect for Cisco worked there for many years, and their sales force is, of course, excellent. Now I would say though that their share in the server market and in the HCI market, where we play and it's been relatively small historically. On the other hand, they're fully aligned with us. They've been a very good contributor to new logos this quarter as well as the last quarter. And so we're very happy with how that partnership is coming along and look forward to continue to grow that with them over time.

Just for Dell, I think that's the most topical and obviously, a lot of things to unpack. From my standpoint, I think that's a mutually beneficial. And you can potentially open to other storage areas. So can you talk about kind of also to Rukmini kind of we talk about integration in the first half of '25, then revenue in the FY '26. So maybe you can talk about strategic rationale behind the [indiscernible] Dell partnership?

So there's -- but every partnership here is a win-win, right? That's to be win for both sides and a win for the customer. So that's how we approach partnerships. With Dell, specifically, there's 2 elements of the partnership. The first element is Dell reselling our HCI solution, other Nutanix solution. So Dell is today in the market, selling an appliance is called XC Plus, that runs Nutanix software on top of their power edge servers. So that's part one of the relationship. Obviously, for us, they have this massive sales force. They know they're a big player in the space. They know how to sell this product. So we're happy about that part of it. That's been in the market now since last quarter, right, just first quarter in the market. The second part of it is an expansion of what we know -- where we normally play, which is we talked about a lot of the VMware deployments today sitting in supporting 3-tier storage, legacy 3-tier storage. Now those customers are starting to look for an alternative to the hypervisors that runs on the servers that are connected to the 3-tier storage. Now historically, our sales motion has been to convert those customers over to HCI architecture. But now we see an opportunity selectively to go after and be able to replace a VM hypervisor without requiring any hardware change and supporting those third-party storage areas. So the second part of our relationship with Dell is exactly around that, which is we are supporting Dell's PowerFlex arrays with our software, with our hypervisor software and customers can replace that the VMware installed with Nutanix installed without disrupting the rest of their infrastructure. So we expect to have that offering in the market in the first half of calendar '25, and it should start contributing in a modest way to revenue in FY '26. And again, these things take time after you get them in the market, they go through an eval cycle, test cycle, and this is a mission-critical application. So it will take some time, but we expect to see some revenue in FY '25 as a result of this.

Got you. So maybe shifting to kind of take a step back kind of broadly, if you look at different channel incentives and promos, obviously, been in place for a couple of quarters. So any latest kind you want to share? And what's the latest thinking behind it?

Yes. First of all, I think those incentives are starting to bear. You're seeing the growth in new logos. And for new logos, we've had incentives to the customers, we have had incentives to the channel partners and of course, some incentives to our sellers. And that's starting to play. And then companies like Cisco, some of our strategic partners are contributing to new logos, right? So we are certainly starting to see that. The second I would say is we also resegmented our go-to-market approach, where there's a tier of our business that is entirely channel-led where we've let the channel have swing at it. We only support the channel, we don't have our sales sets calling on those customers directly. And that portion is a relatively small portion of our TAM, but that's been growing very nicely for us since we introduced it last year. So the channel partners are starting to come on board, they're starting to drive some business for us in some portions of the market and assist us better customers.

So maybe we can talk about repatriation. For Barclays, we have this bi-annual CIO survey, and you continue to see increased repatriation. So for Nutanix, that should continue to provide tailwinds over the medium term because for the enterprises, they look at the workloads. Some of them are not suited for the public cloud. So can you talk about how help with the Nutanix especially from Prime world?

Yes. I think the driver for this, clearly, there's been a significant realization. I think broadly among CIOs that Public cloud has a lot of advantages in terms of being able to get a new application up and running very quickly, take time to market there and get that done very quickly. But on the other hand, at the same time, when you're running a workload in steady state at scale, it's a very expensive proposition to run in the public cloud. So that state is the realization that you have to be selective about what applications you're going to run in the public cloud and what applications you're going to run on-prem. So large steady state applications, you can run in a more cost-effective way on-prem. Now it's -- I think that has had 2 effects in the market. One of it is -- not everything is simply migrating over to the public cloud anymore, this is why we call it hybrid multi-cloud. So a lot of workloads will remain on-prem and they will continue to invest in on-prem. The second is what you refer to, which is some of these workloads that are in the public cloud might get repatriated. We are seeing that, I would say, in some areas. I mean I've had 1 customer in the U.K. who are just doing -- had made a decision to repatriate everything, right? And then we've seen in a public example of like Elon Musk company bought or X Twitter they published a story around how they had repatriated for cost reasons, some of their workloads over and save like 60% when they did that. So we are starting to see that. I wouldn't say it's a full trend when everything is coming back by any means. But selectively, I think yes, and it only helps. I think being in a hybrid world, I think, is a long-term secular growth driver for us, whether it's the pace at which companies will invest in on-prem infrastructure or whether the pace at which they will repatriate from the public cloud.

Maybe we can talk about kind of Gen AI. From my standpoint, we still think Nutanix underappreciated in terms of the private AI DC. As it relates to [ Pinabox ], obviously, you guys had kind of a couple of iterations. So maybe you can double-click on this opportunity sets...

Yes, I think it's a growing and emerging opportunity for us. I mean if you look at Gen AI overall for the last couple of years has been -- there's been a lot of focus on large language models. There's been focus on training of these large language models and massive compute clusters. But that's really being done by a small handful of players. You've got some of the large public cloud providers and some large MSPs coming into play who are doing this. The vast majority of enterprises are not going to go train their own models. They're going to use models that are already pretrained on generic data sets, and they're going to use them on relatively smaller clusters after they fine-tune them or do a rag on them with their data for inferencing, which is really where the actual use cases come into play, and they're able to create value. And those use cases are going to be tied to significant like TCO or ROI type of calculations where -- are they going to improve the productivity as they work for, so the productivity of their customer support or the productivity of their developers or help them automate processes faster. Those are the kind of applications that we are starting to see emerge. AI, like every other application is also going to be hybrid. In the sense that there will be some portions of it, like large-scale training that happens in the public cloud. But a lot of the inferencing will have to happen wherever the data is, wherever the enterprise data is sitting. And we all know that enterprise data, a lot of it is still sitting on-prem and will not necessarily go to the public cloud. A lot of it is being generated at the edges, and it doesn't make sense even from a latency perspective to go take everything and put it in the public cloud. So for that reason, we're going to see a lot of these AI applications and enterprises being deployed as what you call private or in data centers or at the edges. And for that set of applications, we have a turnkey platform which is our Nutanix platform, along with what we call Nutanix Enterprise AI, together, you put them together, we call that GPT in a box. And it's a turnkey platform for companies to easily run these AI applications without having to worry about setting up all his underlying infrastructure. A lot of companies don't have talent, right? They don't have a lot of AI talent. It's pretty scarce. And so you focus -- the companies can focus on building the applications that make sense and deliver ROI and with Nutanix, you can have a turnkey infrastructure to run it. So that's the opportunity. I would say it's very early stages, early days. It's a topic of conversation with every CIO these days. And we have a number of early use cases that we've seen, whether it's for customer support, whether it's for document search and analysis, whether it's for interesting use cases like compliance or fraud detection. These are some of the use cases that we see today.

Shifting to financials to Rukmini. So maybe we can talk about the OPM kind of open expenses, and you guys talked about ramping expenses for the fiscal second half. So can you talk about some of the dynamics we should be aware of heading into the back half?

Yes. Sure. So just a historical context, fiscal year '20 to '23, we kept OpEx dollars on a dollar basis, flat. During that period actually slightly down because we had some work to do internally plus we were in the middle of a business model transition. Since then, in fiscal year '24 last year, we did invest in OpEx, and we have planned to continue to do that now, George. And the reason for that is we have a large market opportunity as Rajiv has talked about. And so we think now is the right time to go make those investments. So what we said for fiscal year '25 is that those OpEx investments will ramp over the course of the year. And so if you look at the implied operating margin, second half is lower than first half. But that's because our revenue split is more or less 50-50 relative to the hubs, but the OpEx is going to continue to ramp through the course of the year, and that's investment in both sales and marketing on the go-to-market side and on R&D.

So just to wrap up, we have a couple of minutes left. Rajiv, maybe just cap off kind of -- from your standpoint, kind of what's the most misunderstood the story about Nutanix?

Yes. I think first of all, I think -- if you look at from an investor perspective, I think we have, for the last 15 years, been a challenger in this market. We've been an innovator, we innovated in pioneer HCI, we've been a successful challenger. I think over the next 5 years, we have the opportunity to become a de facto platform for running applications and managing data in the enterprise across wherever that data or applications sit. And I think that position of leadership is something that we work so hard to earn, right, the right to play there. And we are playing there in a land of giants with a differentiated offering. Our differentiated offering, I mean, the consumer-grade simplicity that we provide, the customer experience, our NPS of 90 that we provide, the quality of the platform itself and how it can actually scale from small to very large and the tailwinds that we have in the market, right, whether it's hybrid cloud now, which is a secular tailwind, whether it's a Broadcom migration opportunity, whether it is the increasing set of partnerships that we now have that we didn't have many years ago. We didn't have a Cisco or a Dell or an AWS partnership in the past, and now we do. And these can all be levers. At the end of the day, with what we have, and by the way, we recognize this year in the Gartner Magic Quadrant for distributed hybrid infrastructure, along with some very large public cloud companies, as leaders in this space. What that helps us for the next several years is to provide a great foundation for us to drive from an investment perspective, continued top line growth while also expanding our bottom line.

That's a wrap. Thanks again, Rajiv, President and CEO; and the Rukmini, CFO of Nutanix to speak at our fireside chat. Thank you.

Thank you, George. Thank you very much.