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

Good early afternoon, everybody. We have Nutanix today, CEO, Rajiv Ramaswami; and CFO, Rukmini Sivaraman. Welcome back, guys. .

Thanks for having us.

All right. Well, Rajiv, let's kick it off with you. A lot has changed around Nutanix over the past year from the continued disruption of VMware to the progress across external storage, public cloud, AI, when you step back, what feels most different about the opportunity in front of the company today?

Yes. I think it's important to realize that Nutanix is no longer just a HCI company. That's how we started. That's what got us on the map and brought us to where we were. But today, we are a much broader cloud platform company. What this means is that we can handle a much broader set of customer needs, resulting in a much larger market opportunity for us to go after. So today, the platform itself works on-prem. It works across multiple public clouds. It supports built-in storage with HCI. It supports third-party storage, which makes it much easier for customers to migrate to our platform. we have a full-scale Kubernetes platform. We have a database platform. And increasingly now, we also have an enterprise AI stack that's starting to gain traction with customers as they look at deploying influence. . So the platform has become much bigger. What that means is that if you look at the landscape of what we can serve for customer problems, we can help them modernize their infrastructure in a very flexible way. We can help them adopt hybrid cloud architectures for them to run their applications for data. We can help them build and run modern applications, which they're doing plenty of. And we can help them in this world of enterprise AI where they're starting to build and run more and more of these enterprise applications. that rely on influencing from a variety of models, both fronter models and open was models. So that portfolio is now much broader and it allows us to address a much broader need. And then while that's happening, of course, we've also seen the supply chain cuts happening and prices on the hardware side going up, which, of course, indirectly puts a crunch on many of our customers. But we're able to offset some of that with the fact that we have a much broader portfolio, but some of these newer elements in our portfolio like external storage ramping up.

Okay. That's a great overview. Rukmini, maybe we can bring that into the fiscal 2017 outlook. You're entering the year with strong bookings momentum, several new growth drivers beginning to contribute. But then as Rajiv mentioned, you've got a more challenging hardware environment, slower growth in the renewal pool. How did all those factors come together in the initial guide what would need to develop for the business momentum to prove stronger than that initial starting point?

Yes. So I'll maybe touch on 3 things. So first, as Rajiv has already alluded to here, we have really robust and strong growth drivers for the business, including our growth in our core hybrid cloud platform, including to storage; B, all of the cloud-native and AI capabilities that we're driving and c, our growing partner ecosystem. So you put all those together, several core growth drivers. So that's the first point. Second, as Rajiv said also was that the supply chain environment for our customers means that when they -- if they need to procure a server on which to run our software, that has become more expensive and it's taking longer. And so what we're assuming for our fiscal '27 is that those dynamics continue, and we only saw it for a portion of '26, as you'll recall, Matt. So for '27, that is a headwind and so we're assuming, for example, that 1 of the assumptions around what we think about is orders that come in with start dates in the future. So we're assuming that, that percent is higher in '27 compared to '26. And then the third piece is we've talked about our renewals cohort. So the first 2 pieces I talked about are more about incremental business, so land and expanding -- landing new customers and expanding with our existing customers. The third piece when you look at our renewal cohort, we expect that to grow in '27 but at a slower rate compared to '26. And so you put all of that in, we believe we have a lot of great tailwinds in the business that we both talked about. And then the supply chain is a bit of a factor outside of our control, that's a headwind. We're trying to mitigate those as well with our support for external storage and our cloud offering that can on bare metal. So that helps mitigate but it doesn't fully offset. So we expect that to be a headwind in '27 Matt, but the core demand for the business continues to be completely strong.

Okay. So you touched on future start dates a little bit, but let's just go a little deeper there. I think some of the business pushed out of fiscal '26 should be contributing this year, but the new bookings could continue to shift to the right. So how do you think about the net effect of that in the guide? And then how could that change if hardware availability actually improves?

Yes. So the net effect of that is a net headwind in '27. Just sort of -- just to be clear on that. Matt, the reason for that is we really saw some of the supply chain headwinds only in the second half of '26, whereas we expect a full year of that -- so it is a net headwind. And to your point, what would cause us to do better than what we expect at this time, it is if somehow this supply dynamic is in, which, again, we -- at this point, we don't expect that, but if that would happen, that would help. -- or another vector, for example, is our support for external storage offerings, which are -- to be clear, small today, but Rajiv said on the earnings call, for example, that we had seen a significant uptick into our fiscal Q4, our July quarter. So if that uptake and interest on that offering from our customers were to be much higher than we have expected, that will help as well. So those are some of the factors that could lead to us doing better than.

A broader adoption of hybrid cloud expense as the public cloud. That would be the other option. .

Yes. So Rajiv, maybe staying with the supply chain backdrop for a moment. given that hardware availability remains uneven and server prices are putting additional pressure on customer budgets, how are those dynamics actually surfacing in the pipeline today? And how do you see customers adopting their plans?

Yes. I think you mentioned some of the sort of minority. But clearly, hardware prices are now 4 to 5x what they were a year ago, right, for servers. And that's certainly putting a count for customers as they have to manage their budgets. Now in a lot of cases, the applications that we play in are mission-critical applications. And when it's a mission-critical application, if the hardware end to support or whatever, you have to refresh it, regardless of the price because it's a business-critical application that you're running. So in that scenario, they have to go ahead and do the transformation. There are other cases where they can defer things. If you're a public sector, for example, and you have no budget left. This is all you have for the year, and you have to go out and get new appropriations. there's not much you can do. So we have seen projects getting postponed as a result of some of these things until budget becomes available. So we have seen those kinds of dynamics. And again, we're able to offset some of that by saying in a lot of cases, we can help you modernize we thought you having to buy any new hardware, whatever. You can use the service and storage you've got or you can use the public cloud where they're hardware easily available and use that as offsetting factors.

I guess I'm kind of curious because if you go to kind of the fiscal '26 time frame, it felt like from a customer behavior standpoint, with the supply chain backdrop becoming increasingly volatile, it felt like it was very reactive nature in terms of pushing out future start dates and requesting separate deal terms for Nutanix. When you think about fiscal '27, given that we're now, call it, 12, 18 months into this sort of challenging procurement environment, do you anticipate maybe a little bit more steadiness in terms of the activity across the customer base? Like talk to us about kind of what you're hearing from customers themselves.

For example, fee started will continue because that's a mean for customers to anticipate the fact that we can close a deal with them, but their hardware is going to be available whenever it becomes available and so forth and they can time their license start then. That's a natural thing that we expect it to continue this year for sure. Now I think customers are getting much more adept themselves and understanding and navigating through the supply chain. It used to be that when it came to hardware, it was like, okay, they had their set of 1 or 2 vendors and they would just have frame contracts with in the procure. Now they're being increasingly going and checking to see what's available across multiple vendors and trying to bring in new vendors if they think they can get better prices or lead times as needed. So they're starting to adapt quite a bit. We had, for example, a large Fortune 500 customer that we talked about, who decided to migrate to the public cloud, right, using our platform so that they could keep all the applications exactly the same way they are, but that was their VMware migration, and they're actually using our database management also to run their databases on top of the public cloud using our platform. So they're starting to become more savvy about using other options, external storage, multiple vendors moving to the cloud, all of these as options to help them navigate through this.

Okay. Great. Now I want to talk a little bit more about sort of your diversification away from hardware. Let's start with external storage. So as Regina mentioned, bookings increased sharply in the fourth quarter. We had several 7-figure wins even with NetApp in limited availability. I guess what are those earlier results telling you about the breadth of the opportunity? And how much could that opportunity expand as those integrations roll out more broadly there.

Look, I mean we've been driving HCI for the last 15 years as a company. And HCI today represents about 20% of the installed base. 80% of the installed base out there is still external storage connected to third-party servers. And what we're able to do now is to go after that installed base and not have to convert it with an architectural shift with new hardware to but instead, tell those customers that they can deploy Nutanix software in those environments without changing anything. So that has a huge effect in terms of rather than trying to fight to convert those customers over, we can meet them where they are today. especially in a world where hardware prices are high, they want to continue to get as much as they can out of their hardware investments. And at the same time, make it much easier for them to migrate to a Nutanix platform. So it's a pretty significant thing. So increasingly now, we think of our platform as a much broader platform where storage is 1 option. We can actually consume our platform with or without our own build in storage. And the rest of the stack is still available. You've got compute virtualization, you've got a network, you've got cloud management, you've got a cubinettis stack. You've got databases of management. You've got a public cloud and you've got AI. So there's a whole stack that we can sell and offerings we can be very relevant to the customers with storage just becoming increasingly an option for the customer based on where they're at.

Yes. Maybe just a follow-up there. Just you expressed that you've been at this for 15 years, HCI is about 20% penetrated. So I guess like question 1 is, why has it taken so long to really capture more of the 3-tier architecture? And then two, do you see products like external storage accelerating that penetration for Nutanix?

Yes. I mean I think the answer to the second question, absolutely is yes. There's no doubt, right? I mean I see external storage support is 1 of our biggest growth drivers as the biggest growth driver, I would say, for FY '27 and beyond for the next few years. And our portion of the business that's coming from external storage will continue to grow over time because we're not fighting the tide right now with as they say in IT, there's people, process and technology. Technology was at least of it actually. Because from a technology perspective, the fact that you can consolidate compute storage, all of this together into a hyperconverged offering has delivered 30%, 40% TCO. That's not changed. But what's required for that to happen is for customers to adopt that architectural mind share, there's different teams managing servers and storage. They have to consolidate those teams together into 1 team, change their operating processes and they need fewer people to run this infrastructure because of the level of automation. Those are people in processing. And those things happen slowly in the enterprise. And that's why I think we -- it's taken us this long. And again, I think we like with every new technology, we started out for, let's call it, simpler applications like virtual desktops and then gradually now migrated to the heart of the enterprise business-critical applications. So HCI will continue to grow over time. There's no doubt it will continue to eat into the overall market. But now for us rather than fight the rest of the market, we can actually embrace the rest of it with external storage.

Okay. Great. And then with NC2, I mean this is another area that gained momentum in the fourth quarter and customers appear to be using it in several ways, right? One is a bridge while they wait for hardware as part of a VMware migration or is it more permanent public cloud deployment. So which of these use cases is proving most repeatable, -- and what does that tell you about the longer-term role of Min the portfolio?

Yes. I think what's important. I think we've been with NCI. We've had it in the market for several years, but I feel like it's time has really come. We're now across all the major cloud providers. We have the supply chain constraints in place that make it harder for customers to get hardware on-prem. And we have cloud migration, which has been an ongoing theme for many years at this point. So if we take all of those things, the NC2 use cases are plentiful. The thing that I want to say is regardless of what the use case is, there's a very high retention rate for customers. Once they use NC2 in the public cloud, they tend to stick with it. All retention rates. We haven't talked about specific numbers, but the retention rates are very high. They -- once they start consuming, they continue consuming. But the use case to go back to your first part, there is just cloud migration. And when I say cloud migration, it's migration and ongoing running, right? They don't migrate and throw away the platform. They migrate and run on this platform. Why? Because they can run the application without making any changes. It performs beautifully. The application owners don't even know it. In fact, we had, for example, State Street Bank talk about how they are using us at pretty massive scale across both AWS and Azure today, right? And they actually said that their users actually got better performance. They didn't even know this happened, but they were getting better. The outcome from a user perspective was much better. That's the kind of value that we can deliver for these customers, and they are operating in a permanent mode across 2 clouds, 2 public clouds and they're on-prem data centers. We see it being used for temporary capacity expansion, whether it be for -- while they're waiting for hardware or just elasticity, we see it being used for disaster recovery. We see it being used for global expansion of footprint without having to own data centers. So all of these use cases, I think, are sticking, and we have customers using every 1 of these.

Okay. Great. Let's turn to VMware for a moment. I think some customers move quickly following the Broadcom acquisition. Others renewed and used that time to assess their options. So as that second group comes back to that decision, like what's changing in the seriousness of those evaluations and the scope of the workloads under consideration?

Yes. I think the -- it's becoming more and more clear that -- in the long term, this is not the platform that they're going to bet on. In fact, if you talk to Gartner, they say only 7% of customers will remain long term, which we are, at least from a sentiment perspective, so they're all looking to -- many of them are looking to migrate over a period of time. What we've done is to make those migrations even easier, right? The migrations are always automated, but now you can do so without changing out hardware as well. So -- and in many cases, now we're able to go in and meet the customer where they're at with their existing hardware and do a seamless migration and get those migrations done. We've done many successful migration solid -- but to your point, we always said this would be a 5-, 10-year journey. Customers are going to migrate in waves depending on their situation. We still have many customers just starting their migration now and many still to start. . So this opportunity will continue for many years to come. It will be in phases. It depends on the customer sentiment, their time line for renewals, their time line for hardware or refresh cycles and then, of course, their own priorities on this versus other things that they have in their minds.

Rukmini, anything you'd like to add on sort of the quality and health of the pipeline around the VMware opportunity? .

Yes. Look, I think as Rajiv has said, I think we think we always say it's a multiyear journey. It continues to be healthy. And I think increasingly, it's hard to sort of say how much of it is because of the Broadcom acquisition versus just -- we've competed with them for a long time as we've said. So -- this we expect will continue to be 1 of our core growth drivers for the years to come. .

Okay. Rajiv, maybe turning to the competitive landscape. Have you seen any meaningful change over the past year in alternatives customers are considering or the factors driving their decisions? And then how is Nutanix positioned to evolve relative to those options?

Yes. Look, I think we spent a lot of time talking about VMware competes for sure, right? And we have our migrations. But almost the first question they say is, okay, we might get called in for 1 of those. But then top of mind for all these customers and also, can you help us with -- and that's where we get into what we can do with there. I'm sure we'll cover that later mate. But with respect to the competitive picture, right, they're looking for a platform that's not just a platform that they use for migrating away from their current vendor, but also a platform that can take them into the future, into the future when it comes to be a platform for AI, for modern applications for hybrid cloud. perspective we haven't seen a huge amount of change in our competitive landscape. The public clouds are both our partners and our competitors when it comes to landing workloads. Red Hat is a competitor. We see them. We nsee Microsoft occasionally on-prem as competitor, but not very frequently. And of course, the biggest competitor we have is inertia on the.

Merger contribution from products like Kubernetes, database automation, cloud management, what needs to happen for portfolio attached to reach that next level? And where are you seeing the strongest early evidence that, that model is beginning to work?