Dheeraj Pandey - Chief Executive Officer Duston Williams - Chief Financial Officer Tonya Chin - Vice President, Investor Relations and Corporate Communications

Thank you for standing by and welcome to the Nutanix, Q3 Fiscal 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to your speaker today Tonya Chin, VP of Investor Relations and Corporate Communications. Thank you. Please go ahead.

Good afternoon, and welcome to today’s conference call to discuss the results of our third quarter of fiscal 2020. This call is also being broadcast over the web and can be accessed in the Investor Relations section of the Nutanix website. Joining me today are Dheeraj Pandey, Nutanix’s CEO; and Duston Williams, Nutanix’s CFO. After the market closed today, Nutanix issued a press release announcing financial results for the third quarter of fiscal 2020. If you’d like to read the release, please visit the Press Releases section of the Nutanix website. During today’s call, management will make forward-looking statements, including statements regarding our business plans and financial targets in future periods, the timing and impact of our transition to a subscription business model, the factors driving our growth, the benefits and capabilities of our new and existing products, 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 quarterly report on Form 10-Q, as well as the earnings press release. These forward-looking statements apply as of today and we undertake no obligation to update 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 today 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 in the Investor Relations section of our website and in our earnings press release. And with that, I’ll turn the call over to Dheeraj. Dheeraj?

Thank you, Tonya, and good afternoon everyone. I appreciate you joining us today and are healthy during this time. Since we have spoke during our second quarter earnings call in late February, the way we live has undoubtedly changed. At that time we were just beginning to see the impact of the coronavirus, which was largely isolated to just Asia. As we try to estimate the potential impact of the virus, we provided Q3 guidance that reflected the worsening business conditions in Asia. Noting, we couldn't then predict what would happen in the rest of the world. Today just 90 days later, we find ourselves nearly two months into a global pandemic. Today I'll start by covering our response to COVID-19, including the trends we are seeing across our customers and end markets. I’ll also talk about where we are finding opportunities to better serve our customers, as the pandemic meaningfully alters the future of work, and I hope makes us a stronger company as we come out on the other side of this. I’ll then turn to talk about the quarter and discuss how the steps we have taken recently enabled us to deliver a strong Q3 performance. And finally, I'll provide an update on the progress we have made in our subscription business model transformation before turning the call over to Duston to discuss our results in more detail. Starting with COVID-19, in February it was business as usual and by the end of the month we anticipated there could be a demand issue in APJ as we noted on our Q2 earnings call. Beginning in March and continuing through April, we saw an increase in demand for our end-user computing offerings, which include both VDI and Desktop as a Service Solutions. While in the rest of our…

Thank you, Dheeraj. With all the disruption and uncertainty that COVID-19 has caused, we were pleased to be able to deliver solid Q3 results in-line with or in the case of EPS, better than our expectations heading into the quarter. As you may recall, when we issued our Q3 guidance in late February, we saw early indications that COVID-19 would cause a demand issue for our APJ operations and we adjusted our guidance accordingly. We did not adjust our outlook for our Americans or EMEA operations as the virus’s impact on these regions was uncertain at that time. The virus clearly ended up affecting all three regions and despite this our teams did an excellent job executing in a very turbulent environment. We also mentioned that we are starting to prudently manage our operating expenses during our Q2 earnings call. This proactive and timely approach was based on our view that it was possible that the current demand environment could deteriorate due to the impact of COVID-19. Once our initial premise of a weakening demand environment began to play out, we immediately took even further actions to reduce expenses, which I will return to a bit later. Our subscription journey continues to move forward as selling term based subscriptions have clearly become the norm. Subscriptions billings now account for 84% of total billings, up from 79% in Q2, and subscription revenue now accounts for 82% of total revenue, up from 77% in Q2. The average dollar weighted term length in Q3 ‘20 including renewals was 3.9 years, flat with the 3.9 years we reported in Q2 ‘20. As with last quarter, this calculation assumes life of device licenses of five-year terms. Now I’ll move on to some specific Q3 financial highlights. TCV revenue or our software and support revenue for…

Thank you. [Operator Instructions] Your first question comes from Katy Huberty with Morgan Stanley. Your line is open.

Thank you. Good afternoon. Dheeraj, as you mentioned, what we're seeing in the current environment is accelerating adoption of public cloud. So I was wondering if you can just walk through what you have in the pipeline and on the product roadmap in terms of any solutions that will be distributed on the Amazon and Microsoft platform, and whether you see that as incremental revenue opportunities or is that just new features layered on top of the current product portfolio.

Thank you Katy for the question. Yeah, in fact just to take a step back, you know our idea of really blurring the lines between on-prem and off-prem is to take all our products and run them in the public cloud as is, and that we believe is going to be the biggest differentiation when it comes to lift and shift; just like what virtualization did 15 years ago. But you know probably public cloud also has some elasticity capabilities that we are now putting as part of our product. So things like auto scale-in, auto scale-out, more autonomous infrastructure that is policy based and somewhat intentful as we call it in product terms. Also commerce, I think you know doing it in the market place and having people go buy something for three months or one year as opposed to really needing a salesperson to do things. There’s a lot of good things that we can actually go and avail there as well. And finally this idea of hybrid, you know where you want part of your infrastructure to run off-prem in a public cloud with parts that actually run on-prem. I think it's very powerful for our customers, because they're going to make some decisions about public versus private based on you know data sovereignty and data gravity and economics reasons, which is laws of physics and laws of the land and laws of economics. So we really are looking forward to the next three to six months based on big sort of announcements coming, but we want to make sure we do it in a differentiated way as opposed to just being the first to market, being the best to market is very important to us.

Thank you for that. And Duston, just as a follow-up, the new customer count accelerated in the quarter to $970. How would you characterize the deal pipeline heading into July versus for instance a year ago?

Yeah Katie, to make sure I understood you, new customers you were referencing?

Yeah, I mean the April quarter of new customers of 970 was an acceleration from the prior quarter, so clearly good performance. Just curious what the old pipeline for new business looks like going into July versus this time last year?

Yeah, just on that, new customer is around 700 in the quarter. So we'll have to sync up with you one and those two numbers. But yeah, the pipeline – and I guess maybe your question is more kind of Q4 in general and where we haven't given any specific guidance it's probably a question that will come up sooner or later. So you know why haven’t I kind of answered your question and maybe a little bit of a bigger question. Now Q4; again you know in my comments I mentioned pipeline, a Q3 generation exceeded our target and it was the biggest in-quarter pipe that we generated in our history. So you know that's clearly encouraging. And if you look at Q4, now we're only you know roughly three weeks into the quarter, so you know take that for what it's worth. But, you know on the surface there's not many things that look terribly out of line. Now you know the results won’t be as good as we thought they would be pre-COVID, but if you go down and look at conversion rates, you now where we should be three plus weeks into the quarter; where we are from you know what's converted from pipeline, that looks okay; the loss rates are actually a little bit lower, the sales cost or a one-to-one linearity is within the bounds of what we would expect historically in months to cumulative, the same thing. We closed several million dollar deals. I think at least three this week and a couple of those were spillovers that we thought was going to close in Q3, actually closed this week; two fed deals you know that pushed from Q3. You know if you look at EMEA, there’s some good stuff going on there…

That's great color, thank you.

Your next question comes from Rod Hall with Goldman Sachs. Your line is open. .

Hi! This is RK on behalf of Rod, thanks for taking my question. Your OpEx came in nicely lower than expectations and you’ve talked about cost cuts and furloughs and slower hiring. So I wanted to ask if you could just give us some confidence that these OpEx that your making don't effect the revenue growth looking out in the future.

Yeah, why not? I can start on that one. You know you can’t do this work without worrying about not FY ’21, but FY ‘22 also to your point, because you know the easiest thing for us to do again would be you know to completely stop everything and not worry about the future growth, but we can't do that. So you know we've done a lot of scenario planning downside base case, best case, and within that environment you have to have a view on FY ‘22 or those scenarios don't work well. So I think the other comment there is don't ignore the fact that we have excess sales capacity coming into this downturn also, so it's not like you know we were razor thin on capacity. So we've clearly got more capacity, so you know it's a fine line we walk and that's why I think we've done some pretty prudent things that you know again, kind of affect everybody and not you know singling you know folks out, because everybody's going to take part in the growth going forward. So I think we've done this thoughtfully, and we'll adjust it every week, every month, every quarter as we need to based on what's happening.

Yes, yes, well said Duston, and I just wanted to add just the fact that you know I mentioned this in my script as well. About 10 years later we have a recession. This is our first recession as a company and I used the word very deliberately, annealing you know, its a process of re-crystallization and gaining more strength. You know when we went public we had 1,800 employees, which is 3.5 years ago, may be close to four years, and now we have more than 6,000 employees. So about 70% of our workforce has never seen a private Nutanix and I think it behooves us to actually look back and think about every dollar that we used to spend four or five years ago. How do we go back to the basics and become a start-up again. So we’re using this opportunity to really go do that as well.

Thank you. I also wanted to ask about your cash flow and liquidity position. Is there a minimum amount of cash that you have in mind to run the business and what you're thinking about potentially accessing the capital markets again?

Yeah. Again, this is something that we look at all the time with scenarios, and they say this downside base case, best case, and based on our view of those scenarios top-line potential and what we have done with expenses and the levers that we can pull with expenses. We feel really good about our cash balance throughout FY ’21, based on what we’ve scenario out in those three cases there. The markets are reasonably open. The terms in some of these - the terms are reasonably good, but again, what we’ve looked at we feel pretty good going forward. I think if we were at some point to raise cash in the future, it would be more around tilted to giving us some optionality with our continued subscription transition. It would be more tilted to that rather than day-to-day stuff. And this would be more potentially around, do we want to have average terms shrink down a little bit further from where they are today, about 3.9. Because we know two things happen, that makes the business much more profitable with some a little bit lower terms, and that’s lower discounting because the lower the term, the lower the discounting. That’s highly leverageable from a business model perspective. And the shorter the term, the quicker that deal comes up for renewal and with a 97% retention rate, the quicker that deal comes up for renewal, the quicker we get an efficient deal levered into the business coming at a much, much lower cost. So if we were going to do something, it would be more around, again, that optionality to make the business much more profitable and you know we’ve got the current debenture out there, but that’s January ’23 timeframe. So there’s lots of optionality around that, too.

Great, thank you.

Your next question comes from Alex Kurtz with KeyBanc Capital Markets. Your line is open.

Thanks and hope everyone is safe and healthy over there. Duston, just to revisit your earlier comment about the pipeline. I think you said it’s like the largest in third quarter pipeline growth in company history, something along those lines. I guess the both of you, what are the workloads that are driving that? Is it just a continuation of the EUC, VDI trends that you saw in the last quarter or are you kind of going back to a heavier mix of big digital transformation projects? So I guess what’s driving that and is it sort of a continuation of last quarter?

You want to take that, Dheeraj?

Yeah, let me at least make an attempt at it. I think a lot of the pipeline in Q3 that got converted to EUC deals, which we reported as 27% of our TCV bookings, a lot of that got created and closed in the same quarter and the numbers that Duston talked about was overall creation in the quarter, which is helpful for Q4 and Q1. I think the mix is very similar. I mean, as I said in my call script as well, that EUC used to be a much larger percentage of our business five years ago. It has come down to 18% a year ago and was 20% a quarter ago and it became 27% this quarter. So, I think our pipeline is in the same range as our bookings in Q3.

Alright. Thanks, guys.

Your next question comes from Jason Ader with William Blair. Your line is open.

Yeah, good afternoon, guys. My first question is just on the guidance. I’m sure this has been hotly debated internally, but why not just give a range, you know that’s what most companies are doing. To completely pull your guidance after some of the comments that you made on the month of May and the metrics being reasonable and the pipeline growth that you saw in Q3, it’s a bit odd to me that you did not give any Q4 guidance. So, just walk us through the thought process there.

Yeah. Again, some things are volatile and we’re early into Q4, you know 3.5 weeks or so into our Q4 and again a lot of companies with a subscription-based business are giving that guidance with a substantial portion of their business coming up for renewals that they know is going to renew. I mean we’re dealing with a chunk less than 10% of our business in that category. So, it’s kind of apples and oranges comparison there, and I gave you some pretty good thoughts about Q4, but for us to go put a range in there now with only less than 10% of the business coming in naturally, we just thought we’d pause for a quarter, and then let things play out macro-wise a little bit and then come back with a fresh view of FY ’21.

Okay, yeah, but I mean like companies like Cisco, that don’t have a lot of subscription, provided a range. I mean I guess, you’re comparing yourself against some of the pure ratable-type models and renewal models, so I guess..

Jason, even for conventional businesses, if you look at, let’s say VMware, 60% of the business is renewals. For us it’s much less than 10%. So, it’s not just about subscription companies. It’s about most companies that actually have a renewal business.

Right, but don’t you have around 30% that’s recurring support?

No, not of the quarterly bookings, no. No, in its entirety Jason, that percentage of recurring, whether you want to call it quarter or now subscription renewals is less than 10%, so substantially different. I mean that’s what we’re building up, that’s the whole story here which we’re talking about, is that we know those renewals as a percentage of the total business, those renewals are going to increase and they’re going to increase over time, we’ve done close to $5 million last quarter. We’ve got a pool of $10 million for this quarter, that’s going continue to accelerate. But today, because we started this only a year and a half ago, these renewals just haven’t timed out. That’s why a little lower term is probably a good thing ultimately, because those renewals flow in quicker than they normally would have.

Also, I know we have a big international exposure, making things a bit more unpredictable as to when governments and economies and businesses are going to open compared to many of the companies actually who are younger, maybe 10 years old, but don’t have as much international business. And at the same time, I think you know to Katy’s question, Duston provided a lot of color about what we think Q4 is looking like right now. So I mean, it’s a fine balance Jason and there is no right or wrong answer. We could have provided a pretty wide range while we said, look, it’s a matter of a quarter and given the fact that we announced this already on May 5, there should be a way to really go and reconcile this with all of you.

Okay, and then one quick follow-up on the billings coming from renewals. That was helpful to get that magnitude that we have in Q3 and Q4. Could you give us some sense of what the percentage of billings that will come from renewals in fiscal ’21 and ’22 - sorry fiscal ’21 and ’22 might look like? Just kind of ballpark numbers there?

Yeah, I mean, we have that all laid out for Investor Day. We’ll do that probably when we give ’21 guidance. Actually, it’s very simple for folks to go model, because you know our average deal length and you know what we’ve done from a subscription perspective. So, it’s pretty easy. That’s kind of the exciting thing. I think it’s pretty easy to go and see this and touch it and feel it, because it does by definition become a pretty substantial piece of the business going forward and again, those renewals, just like every other subscription-based company, come in with a very high efficiency factor. So that’s kind of the exciting stuff going forward. Just getting back to the Q4 guide, I wouldn’t read anything specific into us not providing this. We just think that there’s some volatility that you know we prudently, probably, shouldn’t guide, but things look reasonably okay right now. But it’s early and it’s a period that’s never happened before. I’ve certainly never seen it, so that’s the view, but I wouldn’t read anything specifically into that.

Okay, thank you guys.

Your next question comes from Jack Andrews with Needham. Your line is open.

Good afternoon and thanks for taking my question. I just had a two-part question. I was wondering first of all, if you could just talk about the significance of your partnership with Wipro to launch digital database services and then how big could that be over time. And then the related question is just broadening it out, more generally speaking, should we expect other practice areas to be built with global SI’s around some of your other emerging subscription products?

Thank you for the question. Yeah, in fact we did announce two products with Wipro in the last six months; one around end user computing and one around databases, both of which are powered by either our infrastructure with Citrix or with our controlled plain [ph] on database side which is Era. These are two massively large workloads, databases and desktops, and we’ve done a pretty good job of both of these. They probably are equal sized businesses. If you exclude things like Splunk and other such things that we actually do and more to apps like no-sequel databases and Hadoop and so on, excluding all of that, I think it’s a pretty big business for us. We foresee that many of these will actually have a trouble in the lift and shift to the public cloud and that’s where a lot of our value comes in, because data and compute sit next to – need to sit next to each other for databases and virtual desktops need to be delivered anywhere and everywhere where people are. So I think both these workloads, including what Wipro is doing with their products. Driving our products will be very important part of our GSI strategy. We are working very closely with Capgemini, Arthos, HCL and Infosys as well. In fact, currently they’re a very large customer of Nutanix, so as they think through the OpEx model for themselves, because many of these are also acting as service providers to their Global 2000 customers and we become the infrastructure below that as well. So we’re very excited about our GSI opportunities and we feel like we’ve barely begun to scratch the surface of this.

Great! Thanks for your perspective.

Your next question comes from Simon Leopold with Raymond James. Your line is open.

Hi! This is Victor Chiu in for Simon. You mentioned that all three regions were impacted incrementally relative to your expectations. So can you just help us understand what’s the offset that kind of helped provide some upside relative to your previous guidance expectations?

Yeah, globally I think it was.[Cross Talk] Alright, go ahead, Duston.

No, I’m sorry, Dheeraj. Go ahead, sorry.

Globally, the yin-yang and we call it the puts and the takes. The takes from our side were end user computing. The fact that we were able to do this globally, not just in the U.S. and federal, but also in EMEA and APJ was actually a good tailwind for us. And I think obviously the puts from our side were more on the large deals that we were obviously tracking for the last six months that people have come to postpone or revisit for now. But we do believe that EUC alone have provided a big tailwind.

Okay, that’s helpful. Thank you.

Your next question comes from Mehdi Hosseini with SFG. Your line is open.

Hey guys, this is Nick on for Mehdi, and thanks for squeezing me in at the end here. I just wanted to kind of key in on VDI for a second. Just when we looked forward, is there a more incremental upside with your VDI solution? As in, are there still – are you still hearing from customers like that they need to be, they need assistance getting online and going through this work-from-home set up or is that opportunity pretty much closed at this point? And I have a follow-up.

Oh! I think we are early in this, thanks for the question. We are relatively early in this. Obviously the Global 2000, maybe the Global 5000 had tested this, but even there the penetration is still 30%. Even if you look at Citrix’s data, the enterprise seats is not the same as the number of employees in these large enterprises, and I think large accounts are probably one-third penetrated right now, but the mid-market is yet another very large market and outside the U.S. I think there is a lot more that will get digital. So I believe that this end user computing digital workspace will actually get redefined and it’s probably in its early innings, maybe the second innings more so than the fifth or sixth actually, and it’s not just the future of work, it’s also future of healthcare and future of education. Today there was a really good piece on CNN about universities. They have basically grown their fee structure like 1,400%, 14,000% or 1,400%, I can’t remember the exact number, but over the last 40 years nothing has changed in terms of their courseware and the way they impart education. So there’s a lot of things that are up here for grabs in higher education, state and local, as well as middle school and high school education plus in healthcare and work as well.

Okay, that’s really helpful. If I could just squeeze in one more here, the 97[inaudible], obviously that was not in an era, the kind of era that we live in now, so can you just provide a little bit more color about what you’re thinking about churn or the retention rates going forward, especially as renewals start coming online?

Duston, you want to take that?

Sure. I wouldn’t expect all that much difference quite honestly. The product is very compelling; the value-add is compelling. I mentioned about how AHV becomes even more compelling in a cost conscious environment, which we’re starting to see there. We’ve run those numbers through Q3, the quarter just ended, and there was probably still rounds to around 47 or 97 I’m sorry. So I wouldn’t expect to see too much change there over the next several quarters, but you know we’ll see.

Okay, I appreciate it. Thank you.

And our last question comes from Pinjalim Bora with J.P. Morgan. Your line is open.

Hey guys, thanks for squeezing me in. Dheeraj, we have heard a lot of comments, positive comments about your HPE partnership this Q3. Could you tell us how did you perform maybe versus your expectation and then did the pay as you consume construct for GreenLake helped in this current environment. And then lastly, do you see any value and providing a pay as you consume kind of a model yourself, that’s all I have.

Yeah, thanks for the question. HPE, very good partnership. It’s been about 2.5 quarters, I would say since it began. They definitely have a global presence and our sellers are working together hand-in-hand managing these accounts. The PC [ph] goals a little early I would say, simply because we haven’t put all our products in there, but some of the large customer, especially after COVID we’ve started to see questions emerge, a lot more questions emerge about, can we take entire Nutanix portfolio and have it transfer through GreenLake. I think it’s a pretty novel concept and there’s some interesting partnership opportunities with HP and us, especially in the world of Xi you know. They are talking about Telcos and many of these service providers who currently buy hardware with CapEx. I think GreenLake needs a killer app and Nutanix can be the killer app on top of GreenLake and especially as we take this to GSI’s and Telcos and service providers, all of whom actually, would be very willing to look at hardware in an OpEx model rather than CapEx.

This concludes today’s conference call. You may now disconnect. Thank you for participating.