Nutanix, Inc. ($NTNX)

Thanks, Gabe. AI has obviously dominated the headlines. So for the investor base here, maybe it will be helpful to contextualize like what does Nutanix' place within this domain of AI growth?

Absolutely. So customers need to run AI inferencing and AI agents. And as we've all seen, the market is transitioning from a focus on training these large models, to inferencing and delegating with agents. So these applications is -- there's a whole host of new AI agentic applications that are being built. And these applications are going to run in multiple locations. You will have agents sitting in enterprise desktops, in your laptops that will be accessing inferencing, running in different locations. Some of the inferencing will actually happen on GPU cluster, CPU/GPU clusters inside data centers. Some of them will happen in neoclouds, and some of them will happen in public clouds and in frontier models. Nutanix as a platform we provide a complete stack for customers to run these agentic applications, build and run these agentic applications. Those applications for us in our sweet spots tend to be when they're running them on-prem and when they're running them in neo clouds. And also providing cost and governance and security for people accessing all of these models and inferencing. Because when you're sitting in an enterprise, you care a lot about managing your token costs. You care a lot about which model to use for what use cases. How much access -- who and how much access is provided to these models. So as part of our stack, we provide this gateway capability to enable enterprises to consume all of these models and inferencing wherever they'd like to, with the appropriate visibility, security, governance, et cetera. And at the same time, we deliver the stack for inferencing.

So which inning would you say we're in, in terms of adoption? What are you seeing in your customer conversation?

Yes, market is moving very rapidly. Today, what we see is simple inferencing use cases being deployed in enterprise. We see things like document search, summarization analysis, proprietary applications. For example, we had a bank build a customer application that use a simple open source model to -- they record all the conversation between their sellers and clients and then the model looks for patterns of noncompliance and summarizes those conversations. That's proprietary data, regulatory reasons why it has to be kept on-prem. And so they run a dedicated cluster to do that. We have a large government agency using this for investigating financial fraud, again, similar proprietary data running on-prem. Those are the initial use cases we're seeing. But now the use cases are starting to broaden out with these agentic use cases starting to emerge very early days. But again, I think for Nutanix as a company, we talked at our Investor Day as to how I think this whole AI inferencing wave, we are going to be a beneficiary of that from providing a platform by providing a platform that can run and harness all of these AI inferencing applications.

Okay. That's helpful. Maybe just to talk a little bit about the competitive landscape that you see out there when it comes to your longer-term sort of outlook. Who are you seeing? What is your outlook around potential for share gains? Obviously, VMware, you kind of have like an opportunity there. But more broadly speaking, where else are you seeing a competitor, whether it be with IBM, whether it be with like actual cloud players, too?

Yes. I think the interesting thing is, I think the infrastructure providers, it's the same providers who are providing solutions today and were also moving to provide infrastructure for these AI applications we just talked about. So we have -- on the other hand -- on one hand, we got Broadcom, who was very well established with VMware in these accounts -- in these customers, but most customers are looking to migrate away from them over time. And in fact, there's gotten data out there that says the majority -- vast majority of customers will not have VMware long term. It's going to be a long multiyear migration. But we are adding somewhere in the range of -- last quarter, we added about 730 customers. We've been adding in that range or more for the last several quarters, and most of these customers are coming from VMware. When we go to [indiscernible], we compete against IBM RedHat, really, the RedHat portion of IBM, largely public cloud would be the other big set. And the thing that if you look at Gartner's Magic Quadrant, what they call distributed hybrid infrastructure, which is really hybrid cloud, we are in the leader quadrant along with some of these big players. And we have the smallest player among all these big giants and we've been able to compete pretty effectively and hold that leadership position for a long time, partly because our products are easy to use, very simple, provide very high degrees of customer satisfaction, customer NPS of 90. And so what we're doing as a platform company -- from a competitive perspective, again, is today, of course, the bulk of our market is on virtualized traditional applications, moving to modern, containerized Kubernetes applications and then to these agentic AI and inferencing applications. And we are evolving our platform to keep pace with that migration of what the customers want. And also these applications are now running not just on-prem, but in the public clouds and neoclounds everywhere, right? So that's our philosophy. And we compete against the same folks now. There's again, differences at the next level. I mean the public cloud folks are mostly focused on running everything in the public cloud. We have very hybrid. Broadcom, of course, is mostly focused on private cloud and holding on to the customers they have. Red Hat is, perhaps, somewhat similar to us with Their virtualization platform. We believe we have a very strong virtualization platform that's geared for mission-critical applications. So we feel good about the opportunities and the competitive positioning that we have as a company.

Well, I think like the VMware story in terms of potential share gains. You guys have been executing on that path. When you think about the -- and you mentioned, I think, Rajiv, that like this can be a long like sort of tail here of customers over time. What are some of the things that as customers are looking to migrate like I'm sure there were some who were doing just virtualization, which could move more easily, but like further up the stack, becomes harder and harder to do it. Where are we in that complexity of migration? What are some of the steps that you have taken to ease that process? And what is VMware doing competitively that you think might change the trajectory?

Yes. So to put this in perspective, today, we have about 31,000 customers. There's over 200,000 customers or so on VMware. So a lot of migration still to happen. And we're, like I said, adding 700 to 1,000 customers perhaps every quarter. So with these customers, most of these customers today, 80% of the base, we talked about this at our Investor Day, are running simple virtualization connected to external storage. . And historically, what we were doing was to migrate them over from that use case, what they were deploying to complete HCI platform that we provide. That includes compute and storage, much simplified lower cost of ownership in the long term. Now we have evolved to become much more of a broader platform company today, especially in the light of what customers have today with the VMware situation, where we are now able to actually just replace the software on servers, the legacy hypervisors, with our stack, at the same time allowing them to keep their existing servers, keep their excessing storage arrays, whether it be Dell, whether it be Pure and whether it would be NetApp. So that allows customers to do more in-place migrations, which are having to buy new hardware as well. And from our perspective, we give our customers choice. We'd like to use the storage that you like, uses the compute platform, the networking capabilities we provide, operations and security capabilities. But from a storage perspective, either use us or use any of our partners.

Okay. And any competitor like response that you've seen from VMware...?

Yes, of course, VMware -- their focus is on their big customers, and they're doing everything they can to keep those big customers that have very complex deployments. And from that perspective, the complexity goes up as you deploy more and more of the VMware solutions, right? And once you deploy the networking solution, the VSAN solution, all of those, they get more embedded. But most of the migration is actually fully automated. We have automated tooling to migrate these customers over fully. It's more on the planning of the migration because once the planning is done, it's like a factory. You can keep migrating, automating these migrations. We showed at our recent conference, how a lot of this can be done even without touching the data that they have, they can retain the data that they have and just replace software on servers to get the migration done very, very quickly and efficiently.

Okay. That's super interesting. Maybe to touch on the fact that you said you moved from just being sort of a core HCI player to much more of a platform. If we look out 5 years from now, like how does that mix of ARR look across like the broader portfolio?

Look, I think we -- I mean, just in terms of the migration there in terms of what we have done, we started out being the HCI leader, pioneer HCI leader in the market, still are the HCI leader in the market. We then expanded into a hybrid cloud approach where we now support the platform on AWS, Google, Azure, as well as a number of other service providers who can deploy our solution as well. We also then added support for external storage. So now we provide a platform that has choice. You can use our storage or external storage, you can run them on-prem or you can run them in the public cloud. And then 2 latest additions to our portfolio are a full Kubernetes stack to run modern containerized applications. Again, running them anywhere you'd like. And the last bit and the newest bit of our portfolio is platform to run agentic applications and inferencing applications. So we've broadened our platform to address a wide range of critical use cases for our enterprise customers.

Okay. Okay. That's helpful. Maybe -- I think maybe even Rukmini can chime in on this one. But just sort of can you talk a little bit about the visibility in the business? Like as you look at the predictability and sort of the comfort that you have in like looking at the revenue stream ahead, like maybe you can address some of that, Rukmini.

Yes. So one other thing I would say, if you look back at the history of the company, I think we have a lot more visibility now than we did several years ago because now we have a term-based subscription business model renewals coming in, et cetera. And maybe what's been more uncertain, more recently, Wamsi, as you know, and we talked about these in our earnings calls and so on, is the fact that customers when they are choosing to deploy Nutanix software and need servers, generally speaking, and we'll talk about when they don't need that. But generally, they need servers to run our software. And that, as we all know, because of supply chain challenges in the industry have been harder to come by more expensive. And so those are now factors as we think about when customers are ready to not just buy and make a commitment to Nutanix, but when they can actually use our licenses. So what's that meant for -- what that's meant for this fiscal year, for example, is that we've had really strong underlying bookings growth. For example, in the most recent quarter, we talked about TCV bookings growth being 20-plus percent. But it's taking longer to show up in revenue because we can only recognize revenue when customers are deploying these licenses. So feeling good about the underlying demand and booking strength renewal timing is getting shifted. Now when you think about next fiscal year, so we are currently reported Q4, we're currently in -- Q3, we're in our Q4 right now. So when we start our new fiscal year on August 1, as we think about planning for that, I would say there's probably 3 things at least that we think of as building blocks. The first one is when we finish our Q4, we'll know what our CRPO is the current remaining performance obligations, which, by definition, gets recognized in 12 months, so that's coming through, both from the balance sheet from deferred and from backlog. The second piece that we have a great degree of confidence in is our renewal stream. So we know how much is coming up for renewal. And generally, a good degree of confidence that those will come through. And then the remaining piece, which is actually quite meaningful is everything incremental. So new customers on the platform are expanding with existing customers. And that's the piece that we have the sort of less visibility on because of some of the dynamics I talked about with regard to, well, what will customer behavior be in the light of server prices going up and in the fact that it's taking them longer from when they actually place an order or server to when they get it, regardless of the fact that our software can be deployed as soon as they have it. So those are sort of the building blocks. The other piece I would say is duration of contracts, which can also have an impact on our -- into our revenue visibility and what it will do, ARR not so much because ARR is agnostic of duration. So those are all the pieces now as Rajiv has alluded to, there are some things that we are doing to mitigate some of that, for example, external storage support which we haven't had historically, but now we support the PowerFlex storage platform. We support Pure Storage as of December, and we have more coming online. For example, NetApp is coming online, Lenovo, Dell PowerStore, et cetera. And so what that allows customers to do is they don't have to actually go purchase a server. They can just use existing hardware, which helps. We don't think it fully mitigates some of the headwinds we talked about, but it certainly helps because that is really small today, and we expect it to grow nicely going into '27 and beyond. Same with the ability to run our software on public cloud, as Rajiv talked about. So some puts and takes there, Wamsi, but I think the piece that we're spending a lot of time thinking about and planning for that we have less visibility into is this dynamic around land and expand and what does the supply chain dynamics mean for that piece?

Yes. I've been trying for the last 1 month to say Ever Pure instead of Pure storage So maybe just on your point here on the server side, right? Like we've had some of these large server OEMs report over the last couple of weeks. And their industry standards [ server ] numbers are through the roof. I mean growing like 90%. A lot of that is ASP driven, not necessarily unit driven. But I guess just what we're hearing from the supply chain and from these companies reporting is that the unit -- there is unit growth that's coming over here in the next several like quarters. And so I'm wondering, as you look at the business, if, let's say that server availability got better in some way because customers are willing to -- they feel like we need the compute capacity now, and we just need to deploy this. How does that flow in for you relative to the way that you sort of described about some of the uncertainty associated with server pricing?

I'd say our land-and-expand business is fairly closely coupled to core count, it will be priced on a unit core basis. And the more cores that get sold into the enterprise, the more likelihood of market expansion, right? So from that perspective, yes. I mean, clearly, the hardware folks have been benefiting from the fact that they can pass on the higher cost on memory and even CPUs to their customers. And so the ASPs, as you said, have been going up, Wamsi, quite a bit. We're not so sure that units have been going up that much. But if they do go up, that's great. And by the way, the other thing I would say is even aside from the units, core content processes is going up. So as long as the core count goes up, if you have the same number of units, you will likely have more cores as well going forward. So that also helps.

Okay. Okay. That's helpful. When you think about enterprises, looking at the finite budgets, there's worry that sort of with the spend that's going across on certain categories going up quite significantly. Are you seeing a, any change in the purchasing behavior as far as your conversations with your customers? And are you seeing -- I mean it sounds to me more like there's lack of availability of units that might be actually causing later start dates as opposed to not. But would you say that there is a sense of urgency also, on the other hand, to like pull forward anything from an implementation standpoint or the urgency to bring forward things as opposed to pushing out?

So I'd say customers are acutely aware of the supply chain so are our sellers. This was not a factor before at all, right? It was something that we never worried about. And now we worry about it, the customers worry about it a lot, too. So it's a factor in every deal. Now what's changing? Well, the first thing is customers are now looking far and wide to see who's got the best prices and the lead times. . In the past, they just used to have their regular vendors that they would go to. And now it's really changed. That part of it has changed quite a bit. In some cases, they're looking to see if they can defer purchases for some period of time. And we have seen some of that happen in which case, deals do get delayed, in that scenario, right? So that's the second thing that we see. And the third thing they're also looking for is can they reuse their existing hardware while still modernizing and accomplishing their goals or migrating away from VMware, for example. So more acute focus on that, for sure, [indiscernible] to do that including moving to the public cloud. And we've seen, therefore, external storage picking up nicely, public cloud also picking up nicely because they're not dependent on the server availability on-prem to make that happen. So those are all, I think, the factors that we see from the customer front and it comes down to both pricing and lead times. Lead times typically will lead to more deferral of revenue for us. Now in terms of the actual sort of behavior that we've seen, we certainly did see some pull-ins in Q2, our January, January quarter where customers were afraid of prices going up and they did place orders ahead of time to try and catch the prices before they went up. And certainly, that worked out very well for them because prices did go up a lot in Q3 on hardware, I mean just to be clear. And so now in Q3, we didn't see as much of that because I think prices have already been elevated, right? We haven't seen a whole lot of people rush to get more orders in. So we'll have to see how this goes. I think as the pricing changes, I think so will customer behavior.

Okay. Okay. That's helpful context. Maybe just talking about like large deals, right? Like these deal sizes have gotten larger for you over time. Can you give us some sense of how that's like where we are with like deal sizes, maybe contract duration. So what are the trends that you're seeing versus maybe a year ago in terms of this and the outlook sort of going forward?

Yes. So I think we gave you some of these at our Investor Day in April, so we gave you a view on like $1 million plus ARR customers, for example, and how that's grown over time. One other data point we provided was if you think about new customers coming on to our platform, the initial transaction size on average ACV has also grown for those folks, and that [indiscernible] 16% CAGR over the last couple of years. So yes, we have seen that sort of increase in our efforts to go upmarket and focus on areas, focus our reps on where we think the largest opportunities are. So that continues to be a focus. Now to your point on contract duration, we did see in the April quarter that we reported that duration was higher. It was 3.4 years on average across land, expand and renewal, which is the highest it's been in a while, and that was higher than our expectation as well. And what I would say is that it's more of an instant for now than a pattern because in the first quarter, we've seen this high of a number. And there were a few deals that were of larger size and had a longer duration. And so that contributed to that being to that larger contract duration, both across renewals and land and expand is what we saw the higher duration. So yes, I think it's something we're watching closely. I think it's too early to declare that it's a trend, but something we continue to watch. So that was something we saw. And it does. I think it's important to note that, that does impact some of the other things I talked about earlier in terms of RPO, revenue, et cetera. So that's something we're watching as we think about planning for '27 as well.

What would be the best guess as to why that is happening if you were, but we don't know if it's a trend or not yet, but when do you think it's happening.

Well, I'll give us some anecdotal maybe reasons why customers have shared with us. So one is they are looking for certainty in terms of just pricing their own planning. So they know that they have -- if they sign a 5-year deal rather than a 3-year deal, then they know that that's they have certainty for 5 years instead of 3. And just I think given what the competition has done in many cases where they've sort of been these unexpected surprise and so on, customers are seeking more of that comfort around I know I'm set for 5 instead of 3, my example. So anecdotally, we've heard that, Wamsi, but again, I wouldn't call that a trend just yet.

But do you say that, that's like the larger cohort of like customers coming over from VMware committing to that? Or wouldn't that be a trend that you would call out?

What I'd say, look, in general, we know that practically all of our new logos have VMware in some way, shape or form and that's been the case for a long time, it even before the acquisition. So yes, is that a factor? I think, yes, it is. The only other thing I would add is on the renewal side, for example, one of the things we talked about at Investor Day, where when we were talking about our payment options for customers as you know, historically, our default option and even today, our default option is that we collect multiple years of cash upfront from customers because many of them are paying for us out of their CapEx budget and so they have that outlay. . However, in certain circumstances, we might choose to provide some flexibility for annual payments, for example. And so in some cases, that can lead to a customer agreeing or willing to do sort of a longer duration because they have flexibility on paying for on an annual basis.

How recently has that flexibility been instituted? Has it been pretty typical? Or is this atypical?

It's -- typically it's still a small minority of what we do. And we've talked about, I think, over the last couple of years, and I think at Investor Day, we sort of laid out sort of our view of how we expect to manage that. And that's one of the reasons, by the way, we sort of said that as you think about fiscal year '29, which is the sort of year we gave at Investor Day, if you look at free cash flow margins, those from a margin percent standpoint, we expect to remain more or less the same, high 20s percent dollars will grow as revenue growth, of course. And we said leverage in the model can be more easily observed on the operating margin line. And the free cash flow margin staying at the same -- more or less the same percent is partly because of this where we might provide more flexibility over time but want to manage it within framework.

It seems like you clearly have been overachieving on your operating margin lines. And it -- maybe you can share some perspective about as you think about your planned revenue growth, like how should we be thinking about OpEx growth and incremental leverage because the incremental margins are quite strong. And I'm just wondering if like we're not giving you enough credit for incremental margins.

I was happy to take more credit. I will say, I think that -- if you look at where we are today. So for the full year, obviously, we're at Q4, so we have 1 more quarter to go. For the full year, we guided to about 22.5% on operating margin. And we said again in April at our Investor Day, for fiscal year '29, we said mid to high 20s. Now so -- and we also know that if you look at generally, software companies at scale, many are even higher than that, right? So we know that we have really room to improve that margin over time. And we've also said, I think, repeatedly that growth is our #1 priority. We had a large market. Rajiv has talked about how we've expanded our offerings to go and address, to open up new markets and address those markets. So growth remains the #1 priority. So if we can go and drive that extra point of growth, we want to make sure we're investing to go do that. So that's sort of the first thing I'd say. Then in addition to that, we want to drive that growth in an efficient way. And so that's where I think this combination of how can we continue to drive all the growth that we can possibly go and capture but do so efficiently. So then the question, I think, Wamsi, where you might ask is, well, okay, now you're at about -- you've guided to 22.5%; this year, mid- to high 20s [indiscernible] what happens in the middle. And so that's the -- I think that's as we think about '27 planning, those are the discussions we're having internally. And I think the only other dynamic I'll point out in the near term is that as we've talked about timing of revenue is a little more variable than we have seen historically and that we have to factor that in. If you think about the P&L, obviously, it starts with the revenue line. So look, our intent is to grow operating expenses lower than revenue to make sure that we're doing so in a thoughtful way. We laid out all the drivers at our Investor Day as well. And I think in the near term, it's this dynamic of -- we've talked about how bookings growth have been strong. We want to make sure we're driving that and continue to invest thoughtfully where we can do so while continuing to improve margins during that time period.

I know you addressed this in different forums maybe, but I'll ask this. As you think about the way that you used to guide sort of your long term versus the way that you guided your long term, you've typically given a pathway in some ways. And this time, we didn't have a pathway to fiscal '29. So might be helpful to just hear again, like what is the rationale behind sort of guiding the way that you guided this time around?

Yes. I think it's a fair question. So in the past, we've given CAGRs, for example, and our dollar numbers as well. And we did either of those this time we gave you sort of a point in time, fiscal year '29 and we gave a growth rate in that year. Now if you think about when we announced our Investor Day, it was in the fall of last year, before any of the supply chain challenges upon us. And we were -- it had been more than 2 years since our last Investor Day. So we were certainly due to do one. . But what's happened is in the near term, again, the timing of our revenue and ARR is being impacted by this -- some of the supply chain dynamics while we continue to drive underlying demand. And so -- that was the main reason why we sort of said in fiscal year '29, we're assuming a normalized environment with regard to supply chain and just a more normal macro environment we think that, that's the underlying strength of the business, the mid- to high-teens growth that we put out, Wamsi, but it was harder for us to give something like a CAGR or a dollar amount because of this near-term lack of visibility.

Is the -- and trying to push it a little bit, like is fiscal '29 like why is that the right time frame to think about normalization. What you really believe? Or is that sort of...

I think the point was -- I mean it was a point in time, right? But the point was to talk about what are our fundamental growth drivers. And we are excited as a company in terms of what we can offer, right, to be this platform of choice for all our enterprise customers who are migrating from VMware to going to be a platform for AI inferencing and agentic applications. So there's a rich set of growth opportunities in front of us. There's a growing and broad ecosystem forming around us with all the major players partnering with us. And we -- the point was at Investor Day, we wanted to provide what would that look like in a normalized environment? And we just [indiscernible] because we thought that would be a normalized environment. If it were normalized today, we'll probably say, hey, we can do that now, right, the mid- to high teens revenue and ARR growth and on a sustainable basis with continuing leverage in the operating income line. That's what I would look at what we could do at scale in a normalized environment. And I think we're well positioned to do that. Now in the near term, we couldn't give you much because of what's happening with the supply chain. But the long-term prognosis is what we wanted to share with you all.

Yes. No, that makes a lot of sense. I know we're almost out of time, 30 minutes is just to let to really dig in by a lot. But maybe, Rajiv, just to close out, like what should investors be most excited about over here, right? Like I mean, barring sort of the supply chain uncertainty. It looks like you've built a lot more capabilities. You have a lot more partnerships coming online, but I'd love to hear from you what people should be excited about?

Nutanix has really expanded from being a HCI Pioneer to a multi-cloud platform that can serve the needs for, critical needs, I should say, for enterprise customers as they move from traditional legacy applications to a modern world of AI and running everywhere, running on premises, in public cloud and service providers and neoclouds, we can be the platform of choice for the enterprise. Our track record over the last several years has been delivering consistent growth, growing profitability, while at the same time, delivering very high degrees of customer satisfaction. To this day, our customer Net Promoter Score remains at 19. That's very unique for a company in this industry. We want to keep it that way. And I think as long as we keep doing this, -- we will continue to acquire customers. We will continue to have happy customers see a lot of expansion and continue to grow our top line and bottom line.

Amazing. Thank you so much, Rajiv. Really appreciate it. Thank you, Rukmini. Thanks for being here.

Thank you very much. .

Thank you.