Ladies and gentlemen, thank you for standing by, and welcome to the Nutanix Q4 Fiscal 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your speaker today, Tonya Chin, Senior Vice President of Corporate Communications and Investor Relations. Please go ahead.

Good afternoon, and welcome to today's conference call to discuss the results of our fourth quarter and full year 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 its fourth quarter and fiscal year 2020. If you would 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 and performance metrics in future periods; the timing and impact of our transition to a subscription business model; the factors driving our growth; the timing and impact of our announced CEO transition plan; the investment by Bain Capital, including the company's plans for the use of proceeds and the timing thereof; as well as any expected benefits thereof on the company's leadership and governance structure; 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 our earnings and other press releases issued today. 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 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. Lastly, Nutanix management will attend the Deutsche Bank 2020 Technology Virtual Conference on Monday, September 14, and we hope to connect with many of you there. And with that, I'll turn the call over to Dheeraj. Dheeraj?

Thank you, Tonya, and good afternoon, everyone. I hope that you and your loved ones are safe and healthy. I appreciate you joining us today on such short notice. I realize that we had a scheduled call next week, but with all the news we had to share, we thought it best to connect with you as soon as possible. As I speak with you today, I'm filled with a deep sense of gratitude and fulfillment about the year and the decade at large. Earlier this afternoon, in addition to our earnings release, we issued a press release announcing a succession plan around my role, along with news of a significant investment in our business by Bain Capital Private Equity. Before we talk in detail about our results, I'd like to offer some perspective on these announcements. 2020 has been, for lack of a better word, an extraordinary year. For Nutanix, this has been a year marked by continued progress in our journey to become a pioneer in hybrid cloud infrastructure, a self-fulfilling prophecy for a market category best known as HCI. We've also shown deep resilience in a business and an expanded value that our services provide to customers in a rapidly changing and uncertain world. With a focus on innovation and collaboration, we've expanded our customer base, launched a suite in bare metal with AWS and successfully continued towards our transformation to a subscription-based business model. While our progress this year has not always come in a straight line due to the global pandemic, we're extremely humbled by the execution and effort put forth by our more than 6,000 employees around the world to deliver a strong performance in our fiscal fourth quarter. As the end of our fiscal year approached, I also had the opportunity to step…

Thank you, Dheeraj. Despite Q4 being another quarter that was impacted by significant macro uncertainties, the Nutanix team delivered a very solid quarter that included all-time highs for ACV billings, gross margin, a number of $1 million deals, along with improved free cash flow usage related to a continued focus on operating expense controls. Although we did not provide guidance for Q4, all operating metrics significantly exceeded the current street consensus based on 18 sell-side analyst estimates. Almost all of the business is now subscription-based. Subscription billings now account for 88% of total billings, up from 84% in Q3; and subscription revenue now accounts for 87% of total revenue, up from 82% in Q3. On a billings basis, the average dollar-weighted term length in Q4 '20, including renewals, was 3.8 years, same as in Q3 '20 and down from 3.9 years in the same quarter a year ago. Now a few things on our ACV-based focus going forward. As we enter our new fiscal year, as we have previously communicated, we will fully shift our goals and objectives from a TCV-based focus to an ACV-based focus in order to reduce average contract durations across our book of business. Our experience over the last few years has clearly shown that reduced contract durations enable us to achieve more attractive customer economics and reduced discounting without materially harmful effects in terms of churn. As I'll discuss in more detail, there are some short-term trade-offs that we are going to have to make in order to achieve this ACV-based focus. But ultimately, we believe these will be justified in the long term in terms of growth and operating leverage. A few of the biggest changes associated with this ACV-based focus will be changing our top line guidance metrics from TCV to ACV billings;…

[Operator Instructions] Your first question comes from the line of Jack Andrews with Needham.

Great. Congratulations on all the news today. I wanted to zero in on the opportunity around Xi Clusters on AWS, if I could. Just maybe a 2-part question around that. First, is this a move towards more of an elastic consumption model, perhaps for more of your offerings over time? And secondly, could you discuss what types of workloads you're targeting with this? Would this be Tier 1 workloads or perhaps things that are more ephemeral in nature?

Great question. Yes. So on the first one, the idea is to really make our licenses portable. Just like we did on-prem, we said we could move licenses from one server to another, one hypervisor to another, so it could be cross-platform. And we're trying to apply the same concepts between on-prem and off-prem. So people can build like DR sites in less than an hour, can spill over the desktops, burst over their desktops into the other side. And it's not a separate silo of a spend. If they have gone from licenses that are, let's say, a year or 2 or 3 years, and they still have some terms left in that, they can just take that over to the public cloud as well. So that's very unique about the concept of portable licensing, which we think is one of the biggest differentiators of what we think hybrid cloud should be. And to your second question, we are really focused on enterprise-grade workloads, low latency, IO-intensive, things that IT ops have built over time in the last 10, 15, 20 years that shouldn't really be refactored or rewritten. Go back 15 years, the very value of virtualization was no change to the app, no change to the operating system. And that's what really made virtualization so successful. We want to be able to do the exact same thing, no change to the app, no change to the operating system. And many of these were really low-latency, very high IO-intensive workloads.

Great. Really appreciate the clarity around that. Just as a quick follow-up. Can I ask if there's any update you could share regarding the progression of your partnership with HP?

Yes, quite a bit. I mean, last year, 1.5 years, I think we've done a really good job with them. There is a lot of progress that we have made in terms of diversifying our platform, not just Supermicro and Dell and Lenovo, but also HPE. And I think in the last 3 months, we've been really going deeper on the GreenLake side where we would use the GreenLake offering for our disaster recovery as a service as well, which is our Leap offering. So I think all in all, everything looking really good with them, quality of them. And equally with Dell, actually, I think what we're doing with them on the OEM side have been very future-proof and future-looking. And finally, Lenovo has done a tremendous job with VDI and the desktop offering as well.

Your next question comes from the line of Mehdi Hosseini with SFG.

This is Nick on for Mehdi. So just looking at the industry over the last quarter, I'm curious to hear about how conversations with customers focused in terms of thinking about business continuity issues versus the long-term digital transformation. I assume that business continuity continues to be a much more urgent topic of conversation, but also curious to see whether conversations have shifted to more long-term transition. And I have a follow-up.

Yes. If I were to understand your question correctly, business continuity is the end. Digital transformation is the means to that end, like disaster recovery. If you can quickly spin it up in, let's say, AWS, now you don't need to really own a site on the other side, which is hardware, facility floor, all that stuff that people used to have, which was underutilized. Now if you want to just spin up a DR site, you can do this in AWS. And it's highly unpredictable workload. So why would you actually own that if you could rent it? So there's some great use cases to emerge from what we're doing with hybrid cloud infrastructure, the new HCI. And business continuity of end users is around desktops. Desktop-as-a-service is a huge promise over the next 3 to 5 years. And enterprises woke up. They were not well-prepared for business continuity of the digital workload. There's business continuity issues on the factory side, too. I mean, there's a ton of work that we're doing with so many companies at the edge with SAP HANA and Rockwell, Honeywell, all sorts of Siemens, many different kinds of application and without doing the edge as well. We're really trying to make a cloud-in-a-box possible with zero intervention, hands-free IT, everything being done centrally. And most importantly, if there's a thing to stream to a public cloud, like, for example, disaster recovery sites, you can do that as well.

Right. Maybe just to rephrase the question or to shift a little bit. Last quarter, VDI utilization made up about 27% of bookings. And obviously, due to the pandemic and everyone shifting to work-from-home, your set of solutions catering to work-from-home has become a lot more necessary for business continuity. Maybe an update on VDI and what business continuity looks like in the -- in terms of work-from-home and from COVID.

Yes, absolutely. I think as I mentioned in the latter half of my answer, desktop-as-a-service is a big deal. Virtual desktop infrastructure, what we're doing with Citrix as well, I think has become very important because people just want to plug and play and burst out their existing seats. I mean, the enterprise is only 30% penetrated before COVID when it came to virtual desktops. Virtual desktop before COVID used to be 18%, 19% of our business. Between last quarter and this, it's between 23% and 27% of our business. So it's definitely grown, and we feel like that's a great workload to go after, especially with new customers. Even in the commercial space, we are looking for business continuity as a competitive advantage.

Okay. Just to clarify, that is 23% of bookings in the quarter?

Duston, can you please confirm?

Yes. Yes, 23%. Historically, it's run 18% to 22%. Last quarter, 27%. So it's come down a little bit, but within kind of historical ranges.

Your next question comes from the line of Rod Hall with Goldman Sachs.

This is RK on behalf of Rod. Nice job on the results. And Dheeraj, congrats on building the company to relevance over the years. I wanted to ask about the Bain Capital investment. Could you talk about why now and why structure it in this particular way?

Yes. First of all, great question. The way we look at it is that this ACV transition is a pretty big deal for the company in the next 2 years. And we definitely need to look at what does it mean to not borrow money from the customer, which is what long-term contracts, collecting all that sort from the customers upfront would mean. And also, at the same time, see if we could switch the renewals sooner because renewal's cost of sales is much, much lower. So we were going after the ACV transition. We were going after shortening term lengths. We would have collected less from our customers. And we needed to raise capital just for that alone. So with that, I would also like Duston to probably add some more to this, and we'll come back to the question of why it's structured like this.

Yes. So I've been very vocal over the last, I think, couple of months as far as the power of this ACV focus and what it's going to do to cash and things like that and that we highly likely go in some type of financing vehicle in the next several months or somewhere around there. So that's exactly what we've done. And we had effectively 2 choices here. The conventional route would have been a convertible -- public convertible in the market today. And we could have done that very quickly and raised a lot of money, but from our perspective, that would have been a bunch of effectively faceless investors that bought at instruments, but we really didn't have any contact or interaction with. And going through this type of transition, I just think having somebody like Bain Capital involved in this, that obviously has been through an immense amount of detail of our business model, they understand the power of the model that we've done for subscription, the $2.2 billion that we've sold in subscriptions over the last 2 years that basically hasn't renewed yet and what that business model looks like and the power of the efficiencies and things like that. And so now we have a partner that's going to help us through this transition and help us think through the transition and play that role. And I think we're very fortunate to have somebody step up with $750 million, putting their name down and believing in what we've done from a product perspective and what the business model can do. Now one of the obvious questions is, "This is so expensive, right? Why didn't you just do the public convert?" And the reality is that the $27.75 conversion rate, compared to a competitive public convertible with 100% call spread, so double the premium, this transaction at $27.75 is roughly 3.5%, 4% more dilutive. And I think what we're getting with this investment, the folks at Bain Capital, which have come up on our model very quickly, they understand it inside and out, I think when it's all done, we'll be happy, very happy to take that additional dilution. And don't forget, they don't make money unless the stock goes up, and so we're all in this together. And I think, again, we're just fortunate to have the partnership.

And I think the only last thing I'll add to this is that it also provides a great platform for searching for a great talent, great CEO, great leader for this company going forward.

That's very helpful color. And as a follow-up, Duston, I wanted to ask about ACV. I mean, it makes a lot of sense that you announced switching your focus to ACV. But just from a guidance point of view, could you give us some color on the term length so that we could use that to get into revenues for our models? And then along with that, could you also talk about -- could you give an update on what's the difference in margin structure for a new sale versus an upsell or a renewal contract?

Yes. So on the modeling question, I would -- I think it's actually Slide 11 in our earnings investor deck. I would highly suggest that you go take a look at that, all investors take a look at that. We've done kind of a onetime example that we've kind of opened up exactly with the terms, and we bucket it by TCV dollars and how do you go from TCV to ACV. All the terms are there, 1 year or less, through 7 years, the conversion ratio. So it gives you a great starting point now that you can aid -- not only understand the current quarter, but now you can kind of play with those buckets of terms and say, "Jeez, how -- what do I think terms are going to go down? What's going to be the impact of TCV?" and things like that. So I think that will be very, very helpful. So I think it's Page 11. It's 11 or 12 or something. On the cost, I think the real question is what's the cost of a renewal. And again, today, we don't have much because we've had 4-year terms, as you'll see in that slide deck. We do, do 1-year terms. So the $2.2 billion that we've sold over the last 2 years has effectively not renewed. And so the question there is what does that renew at? What's the cost factor that renews at? And we believe -- and we need to work through this a little bit, and Chris is setting up a small structure of internal folks to go help sales reps and whatever look at this -- it should be 85%, 90% more efficient certainly than new business. And don't forget today, so vast majority of our business since day 1 has always been new and upsell. And new and upsell, it's high cost and it's high risk. And over time, as these renewals start flowing in, the dependency on growth goes from that high-risk, high-cost new and upsell to low-risk, low-cost renewals. And that's the whole thesis here that we've been talking about, and those should come in at a pretty good efficiency factor.

Your next question comes from the line of Simon Leopold with Raymond James.

Great. You talked a little bit about the Bain deal so far, but I wanted to see if maybe you could dig into some of the history of this arrangement. Did you approach them? Or did they approach you? And maybe some of the background or backstory of what led up to this particular arrangement other than your respect for them as a private equity firm.

Yes. I can take this, and Duston, you should please take it from me as well. So Duston and I talked about this -- started talking about this publicly, probably a quarter or 2 ago, about how we'd go and raise some money and we need to do this because we have to fund the transition. We are kind of 2/3 of the way, but we still have another 1/3 to go with the sales comp chain itself, and shortening terms is an important piece of that. So as part of that -- and we know people know the value of Bain Capital, too, because they're a full-service organization, from venture capital and COA to all the way to private equity. And we felt comfortable when they reached out. Hey, they understand growth just as much. Max and Dave are phenomenal people. The more we got to know them, the more we gained their respect, that they're going to look at the thesis, and they embraced this quickly that we're going to take this from hyperconverged infrastructure to hybrid cloud infrastructure. I think there was a meeting of the minds that happened over a matter of 2 months of just back and forth in Zoom. And obviously, we never shook hands ever. We haven't met in person, but what has come about virtually in this last 2 months has just been phenomenal. So we look forward to them as they look at their own spectrum of investment, all the way from COA investments and the value. Enrique is somebody that I've known for a while. So I have a ton of respect for Enrique. But meeting Max and Dave recently has just given me another level of expect for that firm as well.

And just as a follow-up, perhaps if you could talk to how the sales force compensation, I understand it's changed. But as a salesperson, are they now making more money, making less money? Trying to get an appreciation for how your sales force is reacting to this change.

Yes. I think -- sorry, go ahead. Yes, please. Go ahead now.

Yes. You can chime in, too. Sorry. Effectively, they make the same more -- they'll make more if they sell more, obviously. But I mean, right out of the chute, we've just converted as far as what they've been doing on TCV terms and converting that to ACV. So the objective there was to keep everybody whole with this conversion from TCV to ACV. Now again, on the renewal flow, those will be comped at 90% more efficient than the initial transaction from a commission perspective, but it was set up so there would be no penalty from a comp perspective just because of this change. And I think there's probably more upside certainly than there is downside because now they've got more tools to play with. And again, a rep should be completely indifferent from selling a 1-year deal now as opposed to what they were trying to do to sell maximum TCV and term lengths. So now they can focus on 1-year deals if they want, they've got a good 3-year deal, et cetera. So I think there's a bunch more flexibility there from a selling approach. Dheeraj, maybe you want to add something?

Yes. Yes, I mean, I guess we've gone through this when we went from hardware to software almost 2.5, 3 years ago when the sales comp changed. And if anything, the other thing is that the market force is upon us. People have stopped doing 5-year cloud deals. Most good cloud deals are 3-year deals. So they are seeing this from their customers as well. So I think we couldn't have had this artificial thing about go sell -- take TCV for 5 years or 7 years if the market is moving to 3 years.

And just one follow-up on the Bain question, stuff like that. I just want to make sure there's a clear understanding here. This is not a cost-cutting exercise. This is how do we partner up and scale the business in an efficient manner. That's what it is. It's not a cost-cutting. We'll keep the same focus on products and the customers and partners and things like that.

Your next question comes from the line of Matt Hedberg with RBC Capital Markets.

Yes. This is Dan Bergstrom in for Matt Hedberg. You touched a little bit on this in the prepared remarks with the Americas lagging. But anything to note from a geography, customer size, vertical perspective as states and countries go through their various stages of lockdown and reopenings here?

You want to take that, Dheeraj?

Yes, Duston. Go ahead, and I'll chime in later.

Yes. So Americas is just -- as you -- as we all know here, it's a tough environment. And APAC was kind of first to go through this, and things have gotten certainly better there. There's some interesting potential deals brewing in APAC. We'll have to see how that goes. EMEA had a good quarter for us. Americas is doing fine, but again, it's mostly certainly around new customers. It's very difficult because, again, on existing customers, they know the product. They usually love the product. You've got established relationships. So that, in a virtual environment, is much easier than trying to establish relationships and knocking down new business. So -- and probably some of the bigger deals, maybe they get cut down a little bit and things like that, but Americas is still a little tough, I think. From what you see now, it looks like cases are starting to come down and things like that, and people are getting a little smarter. So I think that opens up eventually here. But it's 60%, 65% of our business in a given quarter, so that puts a little constraint on things. But the product is doing well. It's not a product thing. It's not a sales execution thing at all.

Your next question comes from the line of Jason Ader with William Blair.

Yes. And Dheeraj, I'm sure this is bittersweet for you. I know you've always said you'd walk away at the right time. So kudos to you for keeping your word, and you should be proud of what you've built.

Thank you. Thank you, Jason. I remember this question coming from you almost a year ago, and I'd given you some answer there. Thank you. Thank you for the praise, Jason.

Yes. You kept your word. Duston, some fun guidance questions for you. Number one, will you be providing revenue guidance or just ACV billings?

Just ACV billings because, again, revenue, you want to call it billings revenue, whatever you want to call it, it depends on terms, right? And ACV, again, doesn't care about terms. That we can go figure out easily, but I can't -- I put it in the remarks there, I just can't tell you if terms are going to come down 2/10 this quarter, are they going to go up 1/10 or whatever. They're going to go down over time. I guarantee you that, but I can't give you an exact precision. I think, at some point, what we owe investors is a little bit longer-term view of what we believe terms will do when that flushes and when it comes back and then the renewal flows and things like that because it's a very powerful story. It really is. So we need to think through that at some point in time, but now we're just going to stick. And again, I've shown you on that -- in the earnings deck there how it works, and I think you guys can put a model together pretty easily.

So the 3.8, as where it is today, do you think that gets down to like, what, 3? I mean, like by the end of fiscal '21, can you give us some ballpark?

Personally, we'll see because we're only 1 month into the comp here. But I think the important thing to understand here, and I'll round maybe by the 10th or so, but effectively, new customers and existing customers in aggregate have about the same term structure, okay? So that's one data point. And the other data point is, as you know, existing customers make up, call it, 80% of the total business. New customers make up 20% of the total business. So I can see -- and we've done this in a matrix. I can see the new customer, potentially, those terms coming down faster than the 80% of an existing customer because, again, from an existing customer perspective, we can't go to an existing customer and say, "Hey, would you like to do a 3-year term for the same price?" It doesn't work that way. So we have to go have a discussion with the reps, "Jeez, maybe you want to do 3-year deals. Maybe you'd want to commit to 5 years. Maybe you'd only want it to take it for 3 years instead of 5 years and make that commitment. But oh, by the way, with that 3-year term comes an uplift or uplift in your price and reduced discounting." So I don't -- I think there's some natural governor there because of that structure. But again, we're 1 month into this. I do think, and we'll have to see how this plays out, newer products, whether it's Era, Flow, Calm, whatever, Files, tendency to have shorter terms. So can that drag terms down a little bit, the new product? I don't know. But I would be personally very surprised if they ended at 3 by the end of the year.

Yes. I just want to say that...

Yes. Sorry, Dheeraj. After you.

Yes. I think definitely, it's not going to come to 3 years, as Duston said. There's enough push and pull from the market forces, too. I mean, there's large customers who have a CapEx appetite. They want to flush their budgets to the end of the year or infrastructure is probably the first layer of software above hardware. They want to sweat it out a little bit. So I think there's going to be a yin yang here where we believe that it won't really just go rock-bottom with 3 years, something right away. Gradually, this is going to happen. I think this is true for hardware to software. It's going to be true for -- went from 5 years to 3 years as well. And none of our salespeople want to just go do negotiation every year with a longer contract. It's just horrible for them. I think they need a lot more of that trust commitment from our customers, which is why the cloud has landed at 3-year commits as opposed to monthly billing and 1 year kind of stocking.

Your last question comes from the line of Alex Kurtz with KeyBanc Capital.

And likewise, to what Jason just said, Dheeraj, it's been quite a run. I remember when I first met with you in your original office and literally busted into the room, it's been quite an accomplishment. And I'm sure we'll talk more as the months go on here. Duston, yes, Duston, just on the dollar-based expansion rate that we see in the slide deck here, how much is that -- the 133% to the 125% move has to do with the current macro? Are there other factors here which you're thinking about? And then I have another follow-up question.

No. I mean, it's -- I don't think many companies are even at 125%. That's the first thing. So 125% is really, really good. And there's no really other factors in there. Our churn, the way we calculate churn now with kind of a hybrid ACV subscription base, it's 96% or so and things like that. So there's nothing else significantly going on in there.

Okay. So just the prior year as a whole, but I mean, yes, 125% is a great number. So the prior year is elevated for whatever reason.

Yes, yes, yes.

You mentioned the $0.1 million to $40 million conversion, right, on the billings hit from the reduction in duration. Is that -- can I back into that somewhere in the deck that you provided? Or what are the underlying assumptions on that? There's a little more...

Yes. It's pretty easy. It's just in the following year. So that would be the full year impact. I can bring you through the math. It's relatively simple from that perspective. You got a top line and just play with the terms and things like that. So I think once you set up that model, based on our structure, it becomes crazy, but I'll be glad to spend some more time with you.

Management, we'd like to thank you for your participation. This concludes today's conference call, and you may now disconnect.