Nutanix, Inc.

Good afternoon and welcome to today's conference call to discuss the results of our second quarter fiscal 2022. Joining me today are Rajiv Ramaswamy, 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 second quarter fiscal 2022. If you'd like to read the release, please visit the press release section of our IR website. During today's call, Management will make forward-looking statements, including statements regarding our business plans, strategies, initiatives, vision, objectives, and outlook, including our financial guidance, as well as our ability to execute thereon successfully and in a timely manner, and the benefits and impact thereof on our business operations and financial results, our financial performance and targets, and use of new or different performance metrics in future periods, our competitive position and market opportunity, timing and impact of our current and future business model transitions, the factors driving our growth, macroeconomic, geopolitical 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 risks and uncertainties, please refer to our SEC filings, including our annual report on Form 10-K if the fiscal year ended July 31st, 2021, and our quarterly report filed on Form 10-Q if the fiscal quarter ended October 31st, 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, except for revenue, 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 Susquehanna Technology Conference on March 4th, the KeyBank Emerging Tech Summit on March 8th, and the Morgan Stanley TMT Conference on March 10th. And with that, I'll turn the call over to Rajiv. Rajiv?

Thank you, Rich, and good afternoon, everyone. Before we begin, I want to spend a moment acknowledging the current situation in Ukraine. Our thoughts are with all of those who are personally impacted by the situation in the region. Now, turning to our second fiscal quarter. Against the backdrop of an evolving COVID-19 pandemic, we delivered another solid quarter, exceeding all of our guided metrics and saw building momentum in our renewals business. We continue to see healthy demand for the Nutanix Cloud Platform, driven by businesses looking to accelerate their digital transformation, modernize their data centers, and adopt hybrid multi-cloud operating models. Taking a closer look, our second quarter reflected continued execution on our subscription model and was marked by strong top and bottom line performance. We delivered record ACV billings, which grew 37%. year over year, our highest growth rate in three years. Our revenue also grew 19% year over year, despite seeing expected term compression. Once again, we saw good linearity, which, combined with diligent expense management, enabled us to generate positive free cash flow for the first time since we started our transition to subscription, approximately three years ago, putting us well on track to achieving our target of sustainable positive free cash flow by the second half of calendar year 2022. Overall, we are pleased with our second quarter financial results. During the second fiscal quarter, Nutanix published its fourth Global Enterprise Cloud Index report based on a survey of 1,700 IT decision makers around the world. Respondents noted that they're strategically choosing where to run workloads based on security, cost, and performance parameters. We see this cloud smart approach as a driver of hybrid multi-cloud adoption. As such, we're not surprised that 83% of respondents agreed that hybrid multi-cloud was the ideal operating model. The results of the survey reinforce our view that the simplicity and performance enabled by the Nutanix Cloud Platform for deploying and managing workloads across a variety of on-prem and public cloud environments is what the market is looking for. Recently, we took another important step forward on our strategic priority of making our products easier to sell and consume with the global launch of our hybrid multi-cloud solution portfolio. With this launch, we simplified our packaging, metering, and pricing, and aligned our portfolio with the hybrid multi-cloud solutions our customers are consuming, supported by validated designs and deployment best practices. While still early, the initial response to the rollout from customers, partners, sales reps, and industry analysts has been encouraging. We saw numerous wins in the quarter in which new and existing customers adopted Nutanix Cloud Clusters, or as we've recently renamed it, NC2. to extend our platform into the public cloud with an emphasis on disaster recovery and flexible capacity use cases. RBL Bank in India, an existing customer who was already using the Nutanix cloud platform, including Nutanix unified storage and database service solutions, added NC2 on AWS to its existing deployment as a disaster recovery solution for their mission-critical applications, going from proof of concept to live deployment in just three weeks. They found the simplicity, ease of deployment, and seamless failover from on-prem to public cloud set it apart from alternative solutions. Another win saw a government ministry in the MIR region, consolidate workloads from its regional branches onto the Nutanix cloud platform to improve performance, cost, and security while using NC2 on AWS to seamlessly support seasonal spikes in demand. In the second quarter, we continue to receive industry recognition for our unified storage solutions. Nutanix Files was named a leader and outperformer in Giga Ohms Scale-Out File Systems Radar Report. Building on recognition received last quarter in which Nutanix was named a visionary in Gartner's Magic Quadrant for distributed files and object storage for the first time. A win with a US-based sporting goods distributor in the quarter demonstrated the increasing traction we're seeing with Nutanix Unified Storage and our broader platform. This customer was unhappy with the performance of a competing HCI product and replaced it with the Nutanix Cloud Platform, including Nutanix Cloud Infrastructure and Unified Storage Solutions. They also adopted Nutanix Database Service to automate the administration of existing and new databases and facilitate migration to more modern databases. Another win with a European-based energy services provider demonstrated the growing momentum we're seeing with Red Hat, an important strategic partner. This joint customer shifted their container-based big data workloads that were running on OpenShift on a competing HCI solution to the Nutanix Cloud Platform, including our AHV hypervisor. We also saw a North American-based retailer deploy their business-critical workloads on Red Hat Enterprise Linux, or RHEL, running on the Nutanix Cloud Platform. In both of these wins, our joint customers were able to see improved performance and meaningful cost savings by running on our AHV hypervisor, assured by the recent certification of both OpenShift and RHEL on AHV. We are excited about the large and building opportunity pipeline that we see with Red Hat. As we continue to strive for progress across all aspects of ESG, we had two important announcements on the governance front during this quarter. First, we eliminated our dual-class stock structure, simplifying the company's capital structure and ensuring that all shares have equal voting rights. We think this shareholder-friendly move could improve our chances of being included in additional index funds and broaden our shareholder base of both active and passive investors. Second, we also announced that we strengthen our board of directors with the appointment of Gail Shepherd, who currently serves as corporate vice president and head of global expansion and digital transformation for Microsoft Cloud and AI. Gail works closely with Microsoft's largest customers that are implementing multi-year digital innovation and modernization strategies, and with governments and countries around the world driving Azure's regional expansion. We believe Gail's combination of public cloud experience and running businesses at scale is a great fit for our business, and I look forward to benefiting from her insights. In closing, I am pleased with the results of our second quarter. We delivered another quarter of strong growth, exceeded all of our guided metrics, and generated positive free cash flow for the first time since the beginning of our transition to a subscription model. We made important progress on transitioning our hybrid multi-cloud platform towards solutions, which we think will make it easier for us to sell and for our customers to adopt. And we're starting to see the benefit of our building base of subscription renewals, which we expect will help us deliver consistent growth and substantial sales and marketing leverage. This progress makes me optimistic about our ability to deliver against the vast opportunity ahead of us. And with that, I'll hand it over to Dustin Williams. Dustin?

Thank you, Rajiv. I will get right into some of the specific Q2 highlights. ACV billings for Q2 were 218 million, reflecting 37% growth year-over-year, significantly above our guidance range of 195 to 200 million, and ahead of the street consensus number of 198 million. Our renewals team is starting to hit their stride and the renewals business performed much better than expected, accounting for the ACV billings upside in the quarter. Both LOD support renewals and term-based license renewals exceeded our plan, which resulted in a higher mix of renewal business. In any given quarter, our renewals performance is comprised of a certain percentage of late renewals that are executed after the renewal date, on-time renewals, and early renewals that are executed before the renewal date. We forecast renewals based on the ATR, or available to renew, and apply an estimated retention rate. We also estimate the percentage of renewals that will be transacted as late, on time, and early. In Q2, we processed more early renewals than expected, which led us to exceed our renewals projections. Revenue for Q2 was $413 million, reflecting 19% growth year-over-year, above our guidance range of $400 to $410 million, and ahead of the Street Consensus number of $407 million. The revenue outperformance for the quarter was a bit more muted than the ACV Billings outperformance, as early renewals did not impact current quarter revenue. Revenue for LOD support renewals is recognized ratably over the term length, and the outperformance on LOD support renewals was not immediately reflected in the current quarter revenue. Our average contract term lengths overall stayed steady at 3.1, the same as in Q1-22. We previously thought we'd see a slight uptick in term lengths during the quarter since our federal business, which has a seasonal high in Q1, has lower term length, but the higher renewal mix impacted the average contract term length in the quarter. ARR, as of the end of Q2, was $1.04 billion, growing 55% year-over-year. We've now fully rolled out our new solutions offerings globally, and as we've previously stated, overall emerging product comparisons to prior periods are becoming less meaningful. However, era and files, two of our historically largest emerging products, which have relatively clean comparisons to prior periods, both saw healthy year over year growth and record levels of total bookings in the quarter. Q2 sales rep productivity was in line with our forecast and net sales reps were flat in Q2. We were pleased with the addition of approximately 700 new logos in Q2 22, versus the Q1-22 new logo count of 560 and the Q2-21 new logo count of 730. Our non-GAAP gross margin in Q2 was 83.8% versus our guidance of 82 to 82.5%. Non-GAAP operating expenses were 347 million, lower than our guidance of 360 to 365 million. This is a result of continued diligence on expense management, hiring that has been a bit slower than planned, and a slower return to post-COVID normalcy. Our non-GAAP net loss was $6 million for the quarter for a loss of $0.03 per share. This was our lowest non-GAAP net loss since the company began shipping products. Due to linearity remained good. DSOs in Q2 were 36 days, up from 28 days in Q1, 22. Our free cash flow was once again aided by good linearity in collections, coming in at a positive 17 million, over 40 million better than the street consensus. Although we might not quite be at the point that we will consistently generate positive free cash flow on a quarterly basis, we generated positive free cash flow for the first time in over three years. and we're very pleased with the progress we have made. We closed the quarter with cash and short-term investments of $1.29 billion, up from $1.28 billion in Q1-22. Now turning to our guidance. The guidance for Q3 is as follows. ACV billings to be between $195 and $200 million, representing year-over-year growth of 22% to 25%. revenue of 395 to 400 million, gross margin of approximately 82%, operating expenses between 365 and 370 million, and weighted average shares outstanding of approximately 222 million. The Q3 ACV Billings Guidance, which calls for year-over-year growth of 22 to 25%, compares to the actual growth of 18% in Q3 21, and the street consensus growth of 21% for Q3-22. Our average contract term lengths will most likely be flattish in Q3. LOD support renewals should stay somewhat elevated in Q3. The elevated LOD support renewals, which have ratable revenue recognition, combined with a somewhat higher overall renewal mix, will have a small impact on revenue growth in Q3. From a Q3 free cash flow perspective, we would expect a small usage of cash, which is better than the current consensus estimates of negative 25 million. The guidance for FY22 is as follows. ACV billings to be between 760 and 765 million, representing year-over-year growth of 28 to 29%. Revenue of 1.625 to 1.63 billion, non-GAAP gross margin of approximately 82.5% and non-GAAP operating expenses between 1.465 and 1.47 billion. The ACV Billings Guidance of 760 to 765 million compares to the previous guidance range of 740 to 750 million and versus the current consensus estimates of 750 million. The revenue guidance of 1.625 to 1.63 billion compares to the previous guidance range of 1.615 to 1.63 billion and versus the previous consensus estimate of 1.626 billion. With that, operator, would you please open the call up for questions? Thank you.