Nutanix, Inc.

Good day and thank you for standing by. Welcome to the Nutanix Third Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in their listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Valera, Vice President of Investor Relations. Please go ahead.

Good afternoon. and welcome to today's conference call to discuss the results of our third quarter of fiscal year 2021. This call is also being broadcast over the web and can be accessed on our investor relations website at ir.nutanix.com. Joining me today are Rajiv Ranaswamy, Nutanix's President and CEO, and Dustin Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing financial results for its third quarter of fiscal year 2021. If you'd like to read the release, please visit the press releases section of our IR website. During today's call, management will make forward-looking statements, including statements regarding our business plans, goals, strategies, and outlook, including our financial performance, financial targets and performance metrics, competitive position in future periods, the timing and impact of the current and future business model transitions, the factors driving our growth, macroeconomic and industry trends, and the current and anticipated impact of the COVID-19 pandemic. These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. For a detailed description of these factors, please refer to our SEC filings, including our most recent annual report on Form 10-K for fiscal year 2020, filed with the SEC on September 23, 2020, and our quarterly report on Form 10-Q for the fiscal quarter ended January 31, 2021, filed with the SEC on March 4, 2021, as well as our earnings press release issued today. These forward-looking statements apply as of today and we undertake no obligation to revise these statements after this call. As a result, you should not rely on them as representing our views in the future. Please note, unless otherwise specifically referenced, all financial measures we use on today's call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided, to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release. Lastly, Nutanix Management will be participating in the William Blair Growth Stock Conference on June 1st and the Stiefel 2021 Cross-Sector Insight Conference on June 9th. Nutanix will also be hosting a Virtual Investor Day on June 22nd. A link to register for this can be found in our earnings release issued today. We hope to see many of you at these upcoming events. And with that, I'll turn the call over to Rajiv.

Rajiv. Thank you, Rich. And good afternoon, everyone. I hope you're all staying safe and healthy. We are closely monitoring the current COVID situation around the globe, particularly in India. where we've offered help and support to our local team, from healthcare assistance to fundraising for organizations supporting relief efforts in the country. I'm impressed by the resilience of both our employees and customers around the world, especially in India. Now I'll move on to our results. Q3 was a strong quarter across the board. We delivered another quarter of improved execution, continued momentum, and our performance on all our guided metrics. Today, I'd like to highlight some of our accomplishments in the quarter and also discuss progress on some of the key priorities I outlined on our last earnings call. We continue to execute on our transition to an ACV-based revenue model. And as expected, our renewal pipeline is continuing to build. Deal economics continue to improve due to shorter duration terms combined with uplift from our emerging products. In addition, we saw good linearity in the quarter as a result of our ongoing operational improvement to our go-to-market engine. And finally, While we typically see a seasonal decline in backlog in the third quarter, we were able to hold it steady, further demonstrating the strength of demand in the quarter. Overall, we are pleased with our execution and can see that the hard work of moving to a subscription model is paying off. Dustin will go into more details later on our financial performance. Last quarter, I shared my observations as a new CEO at Nutanix and outlined our priorities for driving long-term growth, including simplifying components of our product portfolio, deepening our ecosystem partnerships, continuing our shift to subscription, and nurturing our talent pool. I'd like to give updates on a couple of these priorities today, including our transformation to a subscription business model, and deepening our ecosystem partnerships to provide more impact on how we go to market. Starting with our transition to a subscription model, our average contract term continues to decline, coming down from last quarter to 3.3 years, helping drive higher unit economics. We also see our growing base of renewals as an increasingly important driver of top line growth and sales and marketing efficiency. With this transition well underway and with our increased focus on efficiency, we see a clear path to cash flow positivity and operating profit. And we'll go into more detail at our upcoming investor day. Focusing on deepening partnerships to scale how we go to market, as well as creating more opportunities with larger accounts, is critical to a long-term success. In April, Lenovo and Nutanix announced a complete as-a-service solution for hosted desktops to enable IT decision makers to thrive in the new remote hybrid workforce model. This new solution, all managed as a service with the convenience of a single monthly payment and single point of contact for support, includes Lenovo client devices, Citrix virtual desktops, and Lenovo servers powered by Nutanix software. This new aspect of our extended relationship with the number one seller of PCs in the world is a great example of how we can work with a strategic partner to leverage their capabilities from the data center to the desktop in order to best serve our customers. as well as give us meaningful incremental opportunities. Our partnership with Microsoft also continued to progress. During the quarter, we announced that our Kubernetes solution, Carbon, is now validated with Azure Arc Kubernetes Management. With the ease of deploying and managing their certified Kubernetes clusters on Nutanix HCI, with consistent policies and governance across clusters provided by Azure Arc, our mutual customers now have a smooth and fast path to modern containerized applications in a hybrid cloud environment. This month, we announced that the Nutanix Cloud Platform now extends to AWS GovCloud. providing a unified hybrid cloud environment across Nutanix on-premises and bare-metal Amazon EC2 instances running on AWS GovCloud. US public sector organizations looking for strength and security offered by AWS GovCloud can now accelerate their adoption and leverage a single platform and management interface across their private and public clouds. Next, I'll talk about the momentum in our core software as well as our emerging solutions during the quarter. In Q3, we continued to acquire new customers while our existing customers expanded their engagements with us. We saw continued strength in our core solution reflected by a healthy year-over-year increase in our win rates against both our largest competitor and three-tier infrastructure solutions. We also saw continued strength in emerging products, with our attach rate on a rolling four-quarter basis increasing to 39%, up from 37% last quarter. We are seeing more examples of customers choosing our complete cloud software platform, together with emerging solutions to meet all of their business needs. An example of this was for the government entity in the Asia-Pacific region that chose our cloud platform software, as well as our network security solution, to develop a secure private cloud supporting their mission-critical systems, including security, exchange, and SQL database workloads. Our database management solution, ERA, continues to be an important differentiator for us and had good momentum during the quarter. A financial services company headquartered in Europe selected ERA and other emerging solutions on top of our cloud platform to help expand their infrastructure at scale to support their banking customers' requirements for performance, growth, and financial service level agreements. This customer will use our database management solution to deploy, optimize, and manage SQL databases across multiple hybrid clouds, helping to drastically simplify and standardize their overall database operations. We also saw increased adoption of clusters during the quarter, with use cases including data center consolidation, virtual desktop disaster recovery, and the ability to burst to the cloud for additional capacity. In one case, a Fortune 500 North American financial services company selected Nutanix in a multi-million dollar deal to replace their three-tier architecture and run their VDI workloads, and is using clusters to burst into AWS on demand for disaster recovery in their multi-cloud environment. Next, I'd like to touch on efficiency, which is an important part of our path to profitability. We have increased our go-to-market productivity, including more efficient digital marketing spend, increased leverage of our channel partners, and optimized headcount in geographies based on market opportunity. In connection with these efforts, we recently decreased our global headcount by 2.5% from within the sales and marketing functions as we continue to refine our go-to-market model. We expect this action to yield approximately $15 million in annual savings. Finally, I'd like to highlight some industry awards that Nutanix received during the quarter, which demonstrate our customers' enthusiasm for our products and support. We were recognized by Gartner as a peer insights customer's choice vendor for our emerging solutions for distributed file systems and object storage. In addition, our core software was recognized by TrustRadius as a top rated product in the HCI, server virtualization, software defined storage, and virtual desktop infrastructure categories. We recently won the North Face Scoreboard Service Award for achieving excellence in customer service. All of these awards are based on customer feedback. In summary, I'm very pleased with our execution across the board in the third quarter. I look forward to sharing more information at our upcoming investor day on June 22nd. We plan to go into more detail about our mission to delight customers with a simple, open, hybrid, and multi-cloud software platform with rich data services to build, run, and manage any application. We will also provide insight on our strategy, solution portfolio, go-to-market, and mid-term financial outlook. In the meantime, I will hand it over to Dustin Williams. Dustin?