Nutanix, Inc. (NASDAQ:NTNX) Q1 2024 Earnings Call Transcript

Nutanix, Inc. (NASDAQ:NTNX) Q1 2024 Earnings Call Transcript November 29, 2023

Nutanix, Inc. beats earnings expectations. Reported EPS is $0.29, expectations were $0.17.

Operator: Good day and thank you for standing by. Welcome to the Nutanix Q1 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker for today, Rich Valera, VP of Investor Relations. Please go ahead.

Rich Valera: Good afternoon and welcome to today’s conference call to discuss first quarter fiscal year 2024 financial results. Joining me today are Rajiv Ramaswami, Nutanix’s President and CEO; and Rukmini Sivaraman, Nutanix’s CFO. After the market closed today, Nutanix issued a press release announcing first quarter fiscal year 2024 financial results. 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 financial guidance. 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 more detailed description of these and other risks and uncertainties, please refer to our SEC filings including our annual report on Form 10-K for fiscal year ended July 31, 2023 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 future views. 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.

Nutanix will be participating in the Raymond James TMT and Consumer Conference in New York City on December 5th and the Barclays Global Technology Conference in San Francisco on December 6th. We hope to see you at one of these events. Finally, our second quarter fiscal 2024 quiet period will begin on Wednesday, January 17th. And with that, I’ll turn the call over to Rajiv. Rajiv?

Rajiv Ramaswami: Thank you, Rich, and good afternoon, everyone. We delivered a solid first quarter with results that came in ahead of our guidance. The uncertain macro backdrop that we saw in our first quarter was largely unchanged compared with the prior quarter. However, we saw a steady demand for our solutions driven by businesses prioritizing their digital transformation and infrastructure modernization initiatives and looking to optimize their total cost of ownership. Taking a closer look at the first quarter, we were happy to have exceeded all our guided metrics. We delivered record quarterly revenue of $511 million, exceeding a $2 billion annualized run rate for the first time, and grew our ARR 30% year-over-year to $1.7 billion.

We also had another quarter of strong free cash flow generation aided by good linearity. Overall, our first quarter financial performance was a strong start to our fiscal year. Our federal business is typically strong in our first quarter, and this one was no exception. We saw wins with several different agencies across all three of our expansion vectors, including additional capacity for existing workloads, capacity for net new workloads, and adoption of additional portfolio products. The wins also included expansion into the public cloud with NC2 on AWS, and our first win with a large existing customer for GPT-in-a-Box, our recently introduced turnkey solution for deploying generative AI. We view the breadth and diversity of our wins with this important customer as a testament to our ability to expand within our largest customers.

Another notable win in the quarter was with a Global 2000 bank in the Asia Pacific region. This customer, who signed a significant expansion agreement, selected Nutanix as their sole platform for their future modernization initiatives and planned build out of multiple new data centers. This was a departure from their historical dual vendor strategy. They chose our Nutanix Cloud Platform, including Nutanix Cloud Management to run their containerized, business-critical applications, leveraging its simplicity and built-in automation for infrastructure-as-a-service. They also adopted Nutanix database service for managing and deploying their databases throughout their organizations. We see this win as a great example of our ability to partner with the largest and most demanding companies in the world, as they look to modernize and grow their businesses.

Generating leverage from our partners remains a key focus. And towards this end, I am excited with the early progress we’ve seen with our recently launched Cisco partnership. This past quarter, our joint solution was made generally available to be sold by both sales forces. We also saw good customer interest and secured a few wins for this new offering, which were conversions of customers, who had previously been planning to purchase Cisco’s HyperFlex. While it is still early days in this partnership, I am encouraged by what we’ve seen so far. Another positive development on the partner front in the first quarter was a significant expansion deal we signed with a North American managed service provider, or MSP. This partner was increasing its capacity to handle the expected growth of its Nutanix related business.

We see this win as reflecting the growing traction we are seeing with our MSP partners. On the product front, this quarter we announced important enhancements to the Nutanix Cloud Platform to strengthen its capabilities against ransomware attacks on unstructured data. These new features enable organizations to detect the threat, defend from further damage and begin a one click recovery process, all within 20 minutes of exposure. They build on the strength of the Nutanix Cloud Platform to protect and secure customers’ most sensitive data across clouds. These enhancements reflect our ongoing commitment to investing in our platform. In the past quarter, we continued to receive industry recognition for our Nutanix Cloud Platform, being recognized as a leader in the latest report from Forrester Research in this area.

We view our position as one of only two companies named as a leader in this report, as a reflection of our strong competitive position in the market. Finally, it was a pleasure seeing many of you in-person at our recent Investor Day. We were happy to be able to provide an update on a large and growing market opportunity to discuss our long-term vision of enabling portable applications and to provide targets calling for an ARR compound annual growth rate of approximately 20% through fiscal year ’27 and generation of $700 million to $900 million of free cash flow in fiscal year ’27. We have received great feedback so far from our Investor Day, and look forward to continuing to drive towards the vision and targets we share. And with that, I’ll hand it over to Rukmini Sivaraman.

Rukmini?

Rukmini Sivaraman: Thank you, Rajiv. I will first provide commentary on our Q1 ’24 results, followed by the guidance for Q2 ’24 and fiscal year ’24. Q1 ’24 was a good quarter in which we exceeded the high end of the range on all guided metrics. ACV billings in Q1 was $287 million, above the guided range of $260 million to $270 million and a year-over-year growth rate of 24%. Revenue in Q1 was $511 million, higher than the guided range of $495 million to $505 million and a year-over-year growth rate of 18%. The outperformance was driven partly by stronger-than-expected performance from our U.S. federal government business, which grew significantly year-over-year in new ACV bookings. Our renewals performance also continued to be good.

ARR at the end of Q1 was $1.664 billion, representing a year-over-year growth rate of 30%. Similar to last quarter, we saw a modest elongation of average sales cycles, relative to the year ago quarter. Average contract duration in Q1 was 2.9 years, slightly lower quarter-over-quarter and largely in line with our expectations, due to the higher mix of U.S. federal government business, which typically has lower contract duration. Non-GAAP gross margin in Q1 was 85.9%, higher than our expectations, due to higher revenue and a mix of factors leading to lower-than-expected cost of goods sold. Non-GAAP operating expenses were $360 million in Q1. Non-GAAP operating margin in Q1 was 15.6%, higher than our guided range of 9% to 11%, partly due to higher-than-expected revenue.

Non-GAAP net income in Q1 was $85 million or EPS of $0.29 per share, based on fully diluted weighted average shares outstanding of approximately 293 million shares. Linearity was good, and DSOs, based on revenue and ending AR were 24 days in Q1. Free cash flow in Q1 was $132 million, implying free cash flow margin of 26%, higher than our expectations, largely due to better-than-expected bookings familiarity. We saw a larger-than-expected proportion of Q1 bookings in the first two months of the quarter. And since our payment terms are typically 30 to 45 days, more of the bookings were billed and collected in Q1, than expected. We ended Q1 with cash, cash equivalents and short-term investments of $1.571 billion, up from $1.437 billion in ’23.

Under the share repurchase program, authorized by our Board of Directors at the end of August, we began repurchasing shares in Q1, through a 10b5-1 plan. Given the timing of the authorization, we were in the market repurchasing shares for only a portion of Q1. Moving on to Q2. Our guidance for Q2 ’24 is as follows: ACV billings of $295 million to $305 million; revenue of $545 million to $555 million; non-GAAP gross margin of 85% to 86%; non-GAAP operating margin of 14% to 16%; fully diluted shares outstanding of approximately 297 million shares. The updated guidance for full year fiscal year 2024 is as follows: ACV billings of $1.08 billion to $1.1 billion, representing year-over-year growth of 14% at the midpoint of the range; revenue of $2.095 billion to $2.125 billion, representing year-over-year growth of 13% at the midpoint; non-GAAP gross margin of approximately 85%; non-GAAP operating margin of 11.5% to 12.5%; free cash flow of $340 million to $360 million, representing free cash flow margin of 16.6% at the midpoint of the range.

This updated fiscal year ’24 guidance is higher than our previously provided fiscal year ’24 guidance, across all metrics. I will now provide some additional commentary regarding our fiscal year ’24 guidance. First, we are seeing continued new and expansion opportunities for our solutions, despite the uncertain macro environment. However, as we mentioned previously, we have continued to see a modest elongation of average sales cycles. Our fiscal year ’24 new and expansion ACV performance outlook assumes some impact from these macro dynamics. Second, the guidance assumes that our renewals business will continue to perform well. And a reminder that while our available to renew, or ATR pool, continues to grow year-over-year, it is growing at a slower pace in fiscal year ’24, but is expected to reaccelerate in fiscal year ’25, based on our current view.

Third, the full year guidance assumes that average contract duration would be flat to slightly lower, compared to fiscal year ’23, as renewals continue to grow as a percentage of our billings. A reminder that the full year ACV billing is not the sum of the ACV billings of the four quarters, due to contracts with durations less than one year. We expect full year ACV billings to be about 5% to 6% lower than the sum of the four quarters ACV billings. Finally, a few thoughts on seasonality for the remainder of the fiscal year. Based on our current view, we expect the trend in top line metrics in Q3 relative to Q2, to be more or less similar to what we saw in fiscal year ’23. A reminder that operating expenses tend to be slightly higher in Q3 versus Q2, all else being equal, as Q3 includes the full impact of calendar year resets to payroll taxes.

In closing, we are pleased with our Q1 results exceeding guidance and to raise our top line and bottom line guidance for the full fiscal year. With that, operator, please open the line for questions.

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Q&A Session

Operator: [Operator Instructions] And our first question for today will be coming from in Pinjalim Bora of JPMorgan.

Pinjalim Bora: Hey. Thank you. This is Pinjalim. Thank you for taking the questions, and congrats on the quarter, guys. Rajiv, I was surprised to hear your first customer for GPT-in-a-Box. So, that’s what I’m going to ask. What — maybe add a little bit more color around what this company is doing with GPT-in-a-Box? Is this more of a test dev kind of an environment, or are they looking to actually do something in production using GPT-in-a-Box? Are you seeing similar deals in the pipeline? How should we think about uplift in ACV? A number of questions, just surprised to see a new customer signing up so quickly.

Rajiv Ramaswami: Yes, Pinjalim, so thanks for the question. It’s still early days for GPT-in-a-Box. Actually, we’ve seen good inbound interest from customers, as well as prospective ecosystem partners. Now, we did land that first win for GPT-in-a-Box. It is a federal agency. And the use cases are along the lines of what we’ve talked about. A lot of use cases have to do with document, search, document retrieval that we were looking for patterns, looking for potential criminal activity, et cetera, right? And that’s along the line for what this particular agency was looking to do. Now, from an offering perspective, it’s still very early days for us. It’s still early to really comment on when it’s going to be a meaningful contribution to our numbers, at this point.

And so that’s what I can say about GPT now. Perhaps it might be worth recapping a little bit on a broader basis of how we see this market for us, if that makes sense. So for us, I look at AI, I’ve sort of said this at our Investor Day, but there’s three parts to it, first is landing new applications. Lots of companies looking at new applications like this particular customer and many others. Lining that on our platform. And there, again, I think AI applications are going run around where the data is. And some of the data will be in the public cloud, but others are going to be sensitive. They’re going to be in the private cloud in secure locations, for example. And for those types of situations, we can help with our GPT-in-a-Box platform to provide a turnkey solution for them to both fine tune and train model from their specific data, as well as do inferencing.

That’s the first piece in terms of landing new applications. The second is, of course, about making our own products better. And we do, for example, a lot of telemetry that we gather from customers and we can use back-end AI to analyze that, get insight. We have a product around operations management. In fact, that product we call AI Operations. And so again, there’s a lot of AI behind it to make the operating environment and optimize the operating environment such as capacity planning, et cetera. So that’s the second vector. And the third vector is really using it internally itself to make things more efficient and run us more — automate more processes inside the Company. We are starting that out, for example, with customer service on our end.

So that’s a broader picture. Still early days for us with gen AI. But again, lots of interest, and we’ll continue to engage.

Pinjalim Bora: Understood. One follow-up. We — in the channel, we have been hearing that Red Hat has kind of thrown its hat on for the VMware opportunity with OpenShift’s virtualization technology. You obviously have a strong partnership with Red Hat. How do you kind of see that competition play out as both of you kind of go after the VMware opportunity.

Rajiv Ramaswami: Yes. In fact, I mean, I think the — this was actually the original thesis for the Red Hat partnership, that we complement each other very well, they, from an OpenShift perspective, being — providing a complete platform for modern app development and b, being the underlying infrastructure platform. And so from their perspective, as they compete against VMware on the application side, we compete with VMware on the infrastructure side. So, the partnership was very good from that perspective, good synergies on our side. Now, we have seen several customers adopt OpenShift on top of Nutanix, that continues. And we’ve seen G2K wins here as well with including G2K banks, for example, running OpenShift on the Nutanix platform. So, it’s a good synergistic relationship. We look forward to doing more with them. So in fact, this particular G2K bank in Asia Pacific, that I mentioned, was a good example where they’re running OpenShift on top of our cloud platform.

Operator: And today, our next question will be coming from Jim Fish of Piper Sandler.

Jim Fish: Just wanted to build off the last one and ask it a little bit more directly. You guys have talked about like a little bit of VMware contribution here this quarter. But, maybe you could walk us just through the pipeline. What does the pipeline look now that the competitor’s acquisition has officially closed over to Broadcom and you’ve actually already seen them from what we’ve heard in our channel shacks at least, about them kind of raising maintenance prices pretty significantly. So can you just walk us through a little bit more detail on what you’re seeing on the VMware pipeline itself going forward outside of just the Red Hat opportunity?