5/25/2022

speaker
Operator

and thank you for attending today's Nutanix Q3 fiscal 2022 conference call. My name is Selena and I will be your moderator. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Rich Valera, Vice President of Investor Relations. Please go ahead.

speaker
Rich Valera

Good afternoon.

speaker
Anurk Meenie

Joining me today are Rajiv Ravaswamy, Nutanix's President and CEO.

speaker
Rich Valera

Anurk Meenie.

speaker
Anurk Meenie

Today, Nutanix issued a press release announcing financial results for its third quarter fiscal 2022.

speaker
Rich Valera

If you'd like to read the release, please visit the press releases section of our IR website.

speaker
Anurk Meenie

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 metrics in future periods, our competitive position in market opportunity, the timing and impact trends, including the ongoing global supply chain challenges, and the current 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 for the fiscal year ended July 31st, 2021, and our quarterly reports on Form 10-Q for fiscal quarters ended October 31st, 2021, and January 31st, 2022, 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 the 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 IRR website and in our earnings press release. Lastly, Nutanix Management will be participating in the 4th of June on June 6th.

speaker
Rich Valera

And with that, I'll turn the call over to Rajiv. Rajiv? Thank you, Rich, and good afternoon. Exceeding all our guidelines and metrics and seeing in our renewal business.

speaker
Rich

We continue to see solid demand for our new Nutanix cloud platform, driven by businesses looking to accelerate their digital transformation, modernize their data centers, and adopt hybrid multi-cloud operating models. That said, the quarter didn't finish as we had expected. Late in the third quarter, when we typically book a significant portion of our orders, we saw an unexpected impact from challenges that limited our upside in the quarter and affected our outlook for the fourth quarter. Increased hardware supply chain delays resulted in an increasing percentage of our orders having start dates in future quarters, or in some cases, being delayed pending availability of hardware. This affected in Q3.

speaker
spk03

Continue in Q4.

speaker
Rich Valera

After seeing our attrition rate among sales reps,

speaker
Rich

improved for each of the prior two quarters, we saw it worsen in Q3, driving a lower-than-expected rep headcount entering Q4. She will discuss these issues in more detail in her prepared remarks.

speaker
Rich Valera

Our third quarter reflected continued execution on our subscription model and improving bottom-line performance. We deliver ACV buildings growth of 28%, bolstered by strong execution on our building base of renewables.

speaker
Rich

Our revenue, which continues to be affected by term compression, grew 17%. Top line growth, combined with diligent expense management and leveraged from renewals drew a sharp year-round income. While timing of collections adversely impacted, our free cash flow performance prioritized working towards sustainable free cash flow generation in F523.

speaker
Rich Valera

We're pleased with our third quarter financial and reflected healthy adoption of our core Nutanix cloud.

speaker
Rich

of infrastructure by customers looking to modernize their data centers and deploy hybrid cloud operating models, as well as good and cloud management. It's a seven-figure deal with a large North American-based energy exploration and operations company that was looking to modernize their traditional three-tier infrastructure while adding the flexibility of extending their workloads into the public cloud. This new customer has decided to adopt Nutanix Cloud Infrastructure, including Nutanix Cloud Cluster, or NP2, for public cloud access, as well as Nutanix Cloud Manager for full-stack self-service automation application lifecycle management, and hybrid multi-cloud management capabilities.

speaker
Rich Valera

Their Nutanix solution is to simplify their operations and seamlessly extend their workloads into the public cloud.

speaker
Rich

Another example is an EMEA-based online sports betting platform that was looking to quickly deploy their service with NC2 to a regional AWS location in the Asia Pacific region, going from proof of concept to live deployment in just two weeks. Using NC2, they were able to expand operations into a new region while benefiting from simplicity of a single unified control plane across private and public clubs.

speaker
Rich Valera

We recently launched our updated product portfolio and aligns our offerings with the solutions we saw our customers looking for.

speaker
Rich

Roughly one quarter in is what we're seeing. It's streamlining the coding process, increasing our competitive

speaker
Rich Valera

enabling more high-velocity transactions for our full stack offerings, comprising Nutanix cloud infrastructure, to quickly identify solutions for their specific needs.

speaker
Rich

Our largest win in the quarter, a multi-million dollar order with an EMEA-based company, in the financial services sector, was a good example of a deal that benefited from the adoption of our updated portfolio pricing and packaging. This new customer, who was unhappy with the performance of their business-critical applications on their existing three-tier infrastructure, chose our new Nutanix Cloud Platform full-stack offering, comprising both cloud infrastructure and cloud management,

speaker
Rich Valera

due to its simplicity, built-in automation versus competing alternatives.

speaker
Rich

They also added Nutanix Unified Storage and Nutanix Database Service for their storage and database automation needs, respectively, being impressed by their performance and seamless integration with the broader Nutanix platform. Go-to-market leverage with partners has been one of my top priorities, and we continue to see progress on this front during the third quarter.

speaker
Rich Valera

I'm especially pleased with the momentum with Red Hat.

speaker
Rich

As we've been seeing a building pipeline and growing number of joint wins for both OpenShift and Red Hat Enterprise Linux, running on Nutanix Cloud infrastructure. One example is a North American based financial services provider that was looking to reduce the time and resources required to manage OpenShift on their bare metal servers. They decided to move their OpenShift environment running their business critical workloads to Nutanix Cloud infrastructure, including its AHV hypervisor, looking to benefit from the simplicity and compelling total cost of ownership advantages of a Nutanix cloud platform versus their existing infrastructure. We are excited about the large and building opportunity pipeline that we see with Red Hat. In the third quarter, we continue to receive industry recognition for both our core platform and our unified storage solutions. Nutanix was recognized

speaker
Rich Valera

as a major player in the IGC worldwide distributed scale-out file system 2022 vendor assessment.

speaker
Rich

And we'll also name customer's choice in Gartner's infrastructure and files and systems object store. We're especially pleased with our strong performance

speaker
Rich Valera

in the Customer Review-Driven Peer Insights Program, which we see as a reflection of our obsession with delighting our customers.

speaker
Rich

Now I'd like to talk about our recent progress on another one of my priorities, developing and attracting talent. First, following Dustin Williams' decision to join a pre-ICS with Nutanix, We promoted Rukmini Sivaraman, previously our Senior Vice President of Financial Planning and Analysis, to be our new CFO, effective May 1st. In our five years with Nutanix, Rukmini has a unique understanding of our company and industry.

speaker
Rich Valera

I see Rukmini's appointment as a great example

speaker
Rich

of the deep bench of talent we've cultivated at Nutanix. And believe our financial, strategic, operational, and human capital expertise.

speaker
Rich Valera

The first turning score in a new role.

speaker
Rich

Second, I'd like to highlight the recent appointment of Mandy Dhaliwal as our new Chief Marketing Officer and Shyam Desiradu as our new head of engineering. Both Mandy and Shyam are exceptional leaders and unique insight into what it takes to build and deliver industry-leading solutions.

speaker
Rich Valera

I see our ability to attract and develop such high-quality talent as reflecting belief in the opportunity that's in front of us.

speaker
Rich

and feel confident that we've got the team in place to take Nutanix to its next stage of profitable growth. We continue to see solid adoption of a Nutanix cloud platform from customers choosing Nutanix to modernize their infrastructure and enable their transaction.

speaker
Rich Valera

And we continue to execute well on a building base

speaker
Rich

of subscription renewals, which we see as a reflection of both the strength of our team and our customers' high level of satisfaction with our products. While I'm disappointed with the weaker Q4 outlook due to the aforementioned supply chain and sales rep headcount issues, opportunity, or demand for solutions. mitigating the impact of these challenges, and continuing to drive towards profitable growth. With that, I'll hand it over to Rukmini Sivaraman.

speaker
Rich Valera

Rukmini? Thank you, Rajiv. I am honored to join you all today for my first Nutanix earnings report. And we beat all our guys. Billings was $205 million.

speaker
Rukmini

representing a year-over-year growth of 28% of $195 to $200 million. Our renewal business continues to do well. In Q3, it was due to renewals performing better than expected. It was in line with our expectations. Revenue for Q3 was $404 million, representing year-over-year growth of 17%, exceeding our guidance range of $395 to $400 million. Growth in ACV billing was greater than growth in revenue because orders with future start dates that are booked and collected are reflected in ACV billing, but revenue can only begin to be recognized in the quarter of the actual licensed start date and also because of slight term compression from 3.3 years in Q3 21 to 3.2 years in Q3 22. ARR at the end of Q3 was $1.114 billion, growing at 40. Q3 sales productivity was in line with our expectations. Q3 with fewer reps than planned as the talent market remained highly competitive.

speaker
Rich Valera

As Rajiv mentioned,

speaker
Rukmini

We saw rep attrition worsen in Q3, resulting in lower than expected rep headcount entering Q4.

speaker
Rich Valera

Under the leadership of our new chief, we are both better retention and increased hiring effort.

speaker
Rukmini

Our overall company headcount grew slightly in Q3. New logos in Q3. which is largely in line with our historical seasonal trend in new logo additions from Q2 to Q3.

speaker
Rich Valera

Our sales teams continue to focus on higher quality new logos, which was reflected in year-over-year growth in new logo ASP in Q3.

speaker
Rukmini

Non-GAAP growth margin in Q3 was 83.3%.

speaker
Rich Valera

Non-GAAP operating expenses for Q3 were $342 million, more than our guidance range of $3,000 million.

speaker
Rukmini

This is a result of continued diligence on expense management and hiring that was a bit slower than planned. Non-GAAP operating expenses were $3,000 million, more than our guidance range of $3,000 million. was negative 1%, which reflects our continued focus on operating leverage as we progress toward our goal of achieving sustained operating profit.

speaker
Rich Valera

DSOs were 40 days in Q3, up from 36 days in Q2.

speaker
Rukmini

Free cash flow in Q3 came in at a negative $20 million and was impacted by worse-than-expected linearity of billings. We closed the quarter with $1.3 billion in cash and short-term investments, up slightly from $1.29 billion at the end of Q2. Nutanix transformed our appliance model to a software model starting back in fiscal year 2018 and saw our non-GAAP gross margins grow from the low 60s to our current levels of around 83% in Q3. Our customers run our software on their choice of hardware, which they purchase from server providers, many of whom are our partners. Because we are an infrastructure software provider, customers often rely on servers from hardware providers.

speaker
Rich Valera

This means that when there are delays in server line up,

speaker
Rukmini

the software subscription license start date with the expected availability date for the servers leading to or to their orders until the hardware becomes available. During the last several quarters and until we had experienced minimal impact from supply chain issues.

speaker
Rich Valera

While we have not seen a change in the demand

speaker
Rukmini

And for our solutions, we saw these supply chain challenges impact us late in Q3, which limited our upside. The guidance for Q4 is as follows. ACV billing to be between $175 and $100 million. Revenue to be between $340 and $360 million. non-GAAP growth margin between 79% and 80%, non-GAAP operating expenses between $360 and $365 million, and weighted average shares outstanding of approximately $225 million. The significant majority of the impact on our Q4 ACV Billings Guidance Relative to our previously implied guidance for Q4 is due to the impact of increased, that is, orders that customers book with us but that are not yet collected, and two, customers choosing to delay placing orders with us pending the availability of hardware.

speaker
Rich Valera

Our guidance for Q4 is due to the impact of increased uncertainty in the macro supply chain environment we saw toward the end of Q3 and continuing into Q4 and how rapidly it is changing, we are widening our ranges to reflect that increased uncertainty.

speaker
Rukmini

The guidance assumes that the supply chain challenges continue to worsen in Q4 or close to our previously the link's guidance range. Revenue guidance is more important than revenue guidance relative to their respective previously implied Q4 numbers because orders with future standards that are booked and collected are reflected in ACV billing.

speaker
Rich Valera

Our average contract time in Q4 guidance is well below the previously implied Q4 guidance of approximately $6 million, even though it includes about $6 million for an in-person sales enablement event that was moved into Q4 from Q3. in Q4. As a result, we expect cash usage to be significant in Q4 and higher than the current. Moving on to full-year revenue, the guidance for fiscal year 22 is as follows. ACV billings to

speaker
Rukmini

to be between 735 and 745 million, representing year-over-year growth of 24 to 25 percent, revenue of 1.535 to 1.555 billion dollars, non-GAAP growth margin of approximately 82 percent, billion dollars. As a reminder, full year ACV billing is not the straight summation of the four quarters ACV billing because of the adjustment required for transactions.

speaker
Rich Valera

ACV billing guidance is 94% of the sum of the four quarters of ACV billing. While our Q4 outlook is lower than our prior implied guidance, free cash flow generation

speaker
Rukmini

and non-GAAP operating margin break even in fiscal year 23. We will look to year 23 expectations during our Q4 and fiscal year 2022 earnings call in August.

speaker
Rich Valera

With that, operator, could you please open up the call for questions, please? Thank you.

speaker
Operator

Absolutely. If you would like to ask a question, please press star, question, please press star, followed by question, press star one.

speaker
Rich Valera

As a reminder, if you are using a speakerphone, set before asking your question.

speaker
Operator

We will pause here briefly. The first question comes from Wamsi Mohan with Bank of America. Please go ahead. My first question is for Rajiv.

speaker
spk02

The two things that impacted you in the quarter, you said, were the attrition more than expected of the sales reps. and the supply chain. Rajiv, do you think these are things that will resolve in the fiscal fourth quarter, specifically when going to try and replace them, but given the labor shortages, the required sales reps in the question on the supply chain delays, how long do you think this will last? And so should we expect that, you know, going into fiscal 23, these effects linger on into fiscal 1Q as well. So just your thoughts on the timing on when you can replace the reps as well as on the hardware issues that you're seeing.

speaker
Rich

Yes. So, Ritu, the lower output is because of supply chain hardware. And we saw this.

speaker
Rich Valera

Really started to come in play very late in the last in Q3. Now, if you look at that, I mean, until, you know, again, really until now we were managing that, right? We didn't have.

speaker
Rich

didn't experience any real issues from supply chain, but of course, in leading Q3, this started to become much more significant with orders being delayed. Now, with respect to the supply chain, we are working very closely with our hardware partners to try and improve the supply of the hardware. So, the ability to influence them is somewhat limited. Now, that said, Based on what we are hearing from all the server manufacturers and our hardware partners, we expect that these challenges in the support, on the rep headcount, which was a smaller, much smaller component of the issues that we're facing across the board, right?

speaker
Rich Valera

And we noted in prior quarters that we were somewhat behind our rep headcount targets. Now, in the third quarter, you know, after two quarters of improving attrition, we saw a quarter-over-quarter increase in rep attrition.

speaker
Rich

That led to a lower-than-expected rep count entering the fourth quarter. Now, in terms of what we're doing about that, right, so three things, right? Rep retention, productivity of the reps.

speaker
Rich Valera

Now, on rep retention, segmentation and coverage model.

speaker
Rich

And what that will do is it will result in improved territory coverage in progress, and we expect to really have that ready as we move into our next study. On the rep productivity, we are doubling down on training and enabling and, of course, implementing the system. On the hiring side, since Q3, we've increased our recruiting efforts even more about previous levels and raising results, right, in terms of getting us back to where we'd like to be in terms of the sales rep headcount.

speaker
Rich Valera

So I think, as you can see, we're working on both of these issues, right, and And I think the supply chain is going to last, you know, a few quarters, right?

speaker
Rich

I don't know multiple quarters. We don't know yet, right? And on the rapid conversation, I have a question for you.

speaker
spk02

You know, the new customer count this quarter was 580 new customers. I know in the past you've talked about focusing more on quality versus quantity.

speaker
Rich Valera

I think the average...

speaker
spk02

if I look at from 2Q to 3Q over the last couple of years, I think it's been around 700. So, I mean, are you happy with this level of customer additions? And given the issues with the sales force, should we focus less on the number of customers that are being added in the next couple of quarters? Do you think that becomes less meaningful of a metric? And should we focus more on things like ACB billings or some other metrics?

speaker
Rich

Yes, so Q3 is seasonally weaker than Q2, and we saw a decline roughly in line with historical seasonality in the third quarter, right, when it came to new logos. Now, as you indicated also, we have been focused on higher quality, higher ASP new logos, more so than absolute new logo count.

speaker
Rich Valera

And on that front, we saw a solid year-over-year new logo ASP growth. in Q3, which is what we're driving for.

speaker
Rich

So if we go forward, right, we expect a new logo growth to be driven through, you know, enabling more partner-based selling, continuing to drive our partner autonomy program, trying to get more leverage from our strategic partners, and by continuing to make sure that we have the right sales incentives in place. So, yes, we are focused more on the quality of these logos going forward and the ASPs that we can capture.

speaker
spk02

Got it. Thanks so much. And let me just sneak one more in, if I could, for Rukmini. You know, I think, again, for fiscal 4Q, how would you say that the growth in year renewal would be impacting both the ACV billing seasonality as well as the average contract terms? And should we expect that after 4Q, 1Q average contract term would will decline given that the federal businesses is the more significant part of your revenues in that quarter so any thoughts you have on on the growth on the renewals business and how should we think about the seasonality of ACP billings as well as the yeah thank you for the question so on the first answer your question an entire term so that's why we saw the three

speaker
Rukmini

But I think more generally, I'd say at this point, we are quite 2.8 to 3-year mark, which we had laid out previously.

speaker
Rich Valera

So we're quite close to that level.

speaker
Rukmini

And what we're projecting for Q4 as well. And we expect that to, again, maybe trend down slightly, but not in how close we are to where we think we'll settle. I think your second question was on the seasonality as it relates.

speaker
Rich Valera

And what I think in general is we talked about, I think, in the past.

speaker
Rukmini

It's performed really well for us overall. And I think what it does is we do see the available to renew or APR, which I think we've talked about before on these calls, does go up in general over time as the base of renewals continues to build. So I would say that renewals in general is less seasonal than the new ACV overall. But as you can imagine, red renewals is just at this point an outflow of when those orders came in going back. If the new business that we booked three years ago, two years ago has that seasonality, the available to renew also has some of that seasonality. It's not perfectly correlated, but I hope that answers your question that overall I think our renewal business is doing really well. Our new business did a few years ago, which is somewhat seasonal between the quarters, right?

speaker
Rich Valera

So this is our first sort of full year of renewals, and so we'll continue to watch that closely. Thank you for all the details.

speaker
spk02

Appreciate it.

speaker
Operator

Thank you.

speaker
Rich Valera

The next question comes from James Fish with Piper Sandler.

speaker
Operator

Please go ahead.

speaker
spk08

Hey, guys. Thanks. I want to continue on the supply chain challenges. I appreciate the backlog you now have that should come in when supply comes back. Or put another way, is your backlog up by roughly the $90 million that you had to guide down for fiscal Q4, understanding there There's multiple ways here of how orders get booked or delayed. Are you expecting that, you know, 80, 90 million then to come in during all of fiscal 23? And do you think the persistence of these issues actually persists long enough that puts your 300 to 500 million free cash flow guide in the outfield at risk?

speaker
Rukmini

Thank you, Jim, for that question. I can take that, Rajiv. So a couple of thoughts, and maybe I'll add a little more color to what we said about supply chain. So, you know, as you recall, one of the things we said with the previous quarter when we guided for 2.3 and for full year, the significant majority of that delta is coming from the supply chain challenges, and it shows up in two ways. One is orders that come in. and have future start dates. They're booked but have future start dates. Or they don't get booked because customers are waiting for the availability of the hardware. And the way we thought about trying to estimate Q4 is we looked at the percentage of our orders in Q3 that came in with future start dates. And as Rajeev talked about and I talked about, we saw late in Q3 that the percentage of those orders that came in with future start dates went up. And what we are modeling for Q4, we are modeling that percentage of our orders to come in with future start dates to go up to increase or to worsen compared to what it was in estimating Q4. And I do want to make the point, I think, to your question, Jim, on the revenue piece, right? So if it's booked and we're able to collect it, it does show up in ACB billings, and we do do that. even if we have booked and collected it, it doesn't show up in revenue until the actual date of the license starting. So those are some of the questions, Jim, on backlog and deferred and so on, right?

speaker
Rich Valera

So because of this effect of these increased percentage of orders coming with this, but until supply chain starts See that percentage start to decrease. See that upside or the. Top line just yet. Right, so that's how I would try by thinking about backlog and deferred revenue.

speaker
spk08

And just on that 300 500 million free cash flow, is that still? on the table here. I know that's far out, but.

speaker
Rukmini

Yes, thank you for reminding me of that. So I think what we're, you know, we are in the process of, we are anticipating exiting fiscal 22, you know, below our earlier expectations and all the increased uncertainty we're seeing with respect to the supply chain.

speaker
Rich Valera

So we're not in the position right now to affirm for 23 specifically in the, but I will say, and I think it's worth emphasizing this, that we remain focused on

speaker
Rukmini

profitable growth and continue to prioritize working towards sustainable free cash flow generation and non-GAAP operating margin break-even in fiscal 23.

speaker
spk08

Okay, fair enough. My follow-up would be on actually the new packaging modules. How should we think about the rank order of these new packaging modules that are being adopted and after the primary one, what package or two are coming second or third? I know it's very early, but, you know, in what kind of timeframe are you expecting to get that second or third add-on, especially as we're one quarter into kind of the new package?

speaker
Rich Valera

It's been pretty good, right?

speaker
spk03

So if you look at the largest deal of our quarter, last quarter was from an EMEA-based

speaker
Rich

financial services company. And this was facilitated by the use of our new solutions-based pricing. And by the way, in that case, they essentially bought the entire portfolio, right, the full Nutanix cloud platform, all of it. Now, more specifically, right, a couple of things we've been seeing. First is more rapid closure of deals, right, utilizing this new pricing and packaging, right, and second, to our cloud infrastructure solution.

speaker
Rich Valera

So at least, you know,

speaker
Rich

The new solution packaging continues to be adopted on an increased basis. We expect to see, again, high-velocity transactions and more attached of our portfolio products, which should help in the productivity of our sales reps and our partners.

speaker
Operator

Thank you. The next question comes from Meta Marshall with Morgan Stanley. Please proceed.

speaker
Meta Marshall

Great. Thanks. I wanted to just kind of briefly touch on stock-based compensation as a part of attrition. And just, you know, you noted that you were seeing kind of larger than expected attrition. Was stock-based comp any part of that, you know, just given the recent evaluations kind of across a lot of names, are there any – efforts or adjustments that you guys are planning on making as part of kind of increasing retention of sales reps. And then clearly, you know, it sounds as if kind of the core underlying business is seeing some similar trends, but just whether in any region or

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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