Nutanix, Inc.

Hello, and welcome to Nutanix second quarter 2023 earnings comp call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to your speaker for today. Rich Valera, you may begin, sir.

Good afternoon, and welcome to today's conference call to discuss the results of our fiscal second quarter of 2023. Joining me today are Rajiv Ramaswamy, Nutanix's president and CEO, and Rukmini Siddharaman, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing financial results for its fiscal second quarter of 2023. 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, strategies, initiatives, vision, objectives, and outlook, including our financial guidance, as well as our ability to execute the Iran successfully and in a timely manner, and the benefits and impact thereof on our business, operations, and financial results. our expectations regarding the resolution of the investigation, its impact on our financial statements, including our financial guidance, our financial performance and targets and use of new or different performance metrics in future periods, expectations regarding profitability, our competitive position and market opportunity, the timing and impact of our current and future business model transitions, the factors driving our growth, macroeconomic, geopolitical, and industry trends, including global supply chain challenges, and the current and anticipated impact of the COVID-19 pandemic and its effects. These forward-looking statements about 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 and other risks and uncertainties, please refer to our SEC filings, including our annual report on Form 10-K for the fiscal year ended July 31st, 2022, and our quarterly report filed on Form 10-Q, the fiscal quarter ended October 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 this call. As a result, you should not rely on them as representing our views in the future. Lastly, Nutanix Management will be participating in the Morgan Stanley TMP Conference in San Francisco on March 8th, and we hope to see you there. And with that, I'll turn the call over to Rajiv. Rajiv?

Thank you, Rich, and good afternoon, everyone. Against an uncertain macro backdrop, we delivered a solid second quarter with results that came in ahead of our guidance and saw continued strong performance in our renewals business. With respect to the macro backdrop, in our second quarter, we continued to see businesses prioritizing their digital transformation and data center modernization initiatives enabled by our platform. However, we have seen some increased inspection of deals by customers, which we believe is likely related to the more uncertain macro backdrop. And this is driving a modest elongation in sales cycles. We've considered this dynamic in our outlook for the remainder of the fiscal year. Supply chain constraints with our server partners improved compared with the prior quarter. I'd like to comment on the investigation mentioned in our press release. We recently discovered that evaluation software from one of our third-party providers was instead being used for interoperability testing, validation, and customer proof of concept over a multi-year period. Our audit committee commenced an investigation into this matter, which is still ongoing, with the assistance of outside counsel. Rukmini will provide more details on the near-term reporting implications of this matter. But I'd like to emphasize that we do not believe it will have a significant impact on the fundamentals of our business and overall prospects. Taking a closer look at the second quarter, we delivered solid top-line growth, including 23% year-over-year ACV billings growth, driven by continued strong performance in our renewals business. We again demonstrated good expense management, which helped us generate $63 million of free cash flow, continuing our strong recent free cash flow performance. Overall, I'm pleased with our financial performance in the second quarter. Our second quarter results reflect the value our customers are seeing in both our core cloud platform and in adjacent solutions in our portfolio, with particular strength in Nutanix cloud management. A good example is our largest new customer win in the quarter. which was with a federal agency looking to modernize their infrastructure. They replaced their legacy three-tier environment with Nutanix's cloud platform, including Nutanix Cloud Management to run their business critical applications, leveraging its simplicity and built-in automation for infrastructure as a service. They also added Nutanix Unified Storage to service their unstructured data needs. We see this as a good example of a customer adopting our full-stack offering to modernize and automate their IT infrastructure. Another notable win in the quarter was with a bank in the APAC region who had been running a key business-critical application in the public cloud on Red Hat's OpenShift. they were having performance issues and were unhappy with the incident response times of their public cloud service provider. So following an evaluation of multiple on-prem and public cloud options, the customer chose to run OpenShift and their critical application on-prem on the Nutanix Cloud Platform, including our AHV hypervisor, concluding that it was the alternative that could deliver the best performance and total cost of ownership. This deal reinforces our view that cloud is an operating model, not a destination, and that our Nutanix Cloud Platform is ideally suited to enabling the hybrid multi-cloud operating model increasingly favored by IT professionals. Following the general availability of NC2 on Microsoft Azure late in our first quarter, we saw solid momentum with NC2 in the second quarter. A good example is a win we had with an EMEA headquartered provider of global transportation services looking to accelerate their migration to the public cloud, reduce their data center footprint, and optimize their public cloud spend. Following a rigorous evaluation of alternatives, including native public cloud, this customer chose NC2 on Azure, which they found enabled a roughly 4x faster migration, lower migration costs, and significantly lower operating costs. This win demonstrates how our customers appreciate the ability to rapidly and seamlessly shift their workloads from their private clouds to the largest public cloud providers with the consistent management, governance, and data services provided by the Nutanix Cloud Platform without the time and expense of refactoring their workloads and with lower ongoing operating costs. On the product front, during the second quarter, We delivered meaningful upgrades to our core platform with the release of AOS 6.6, which offers enhanced data services and a number of networking and security related features, further strengthening its capabilities to support business critical applications. In closing, I'd like to provide some thoughts on our priorities and outlook. First, Our overarching priority remains delivering sustainable, profitable growth through judicious investment in the business, execution on a growing base of renewables, and diligent expense management. Our strong free cash flow, along with solid top-line growth in the second quarter, reflects the progress we made to date towards this objective. While the macro environment remains uncertain, we are encouraged that the strength of our business model, underpinned by our growing base of renewals and our ongoing focus on profitability, allow us to raise our fiscal year top-line outlook and reaffirm our free cash flow outlook. I remain confident in our ability to continue to capitalize on the vast opportunity in front of us. while continuing to drive sustainable, profitable growth.