Perfect. Welcome everybody. I'm gonna read a very short disclosure, and then we'll get into questions. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. For those who don't know me, I'm Meta Marshall. I cover kind of the enterprise networking and storage group here at Morgan Stanley. We're delighted to have Rukmini Sivaraman, the CFO of Nutanix. I have a whole list of very long-term questions, just given kind of earnings earlier this week, I just wanted to give you an opportunity to kind of start out with kind of just explaining what's going on with the audit committee investigation.
Thank you, Meta. First of all, it's great to be here. Thank you for hosting us. It's, it's great to see you all. Thank you for coming. I will start with this. You know, we disclosed on our earnings call that we had discovered some improper use of sort of third-party evaluation software that we were using instead of evaluation purposes for, you know, validation, proof of concept, et cetera. Management discovered this during the quarter, we are doing all the right things to get this addressed and working closely with just the right expert advisors to make sure that this is done in a timely manner, but also in a complete manner. We hope to sort of share more about it once it's resolved here.
I will say as a result of that, we are not gonna be able to file our Q on time.
Mm-hmm.
Again, the intent is to resolve this as completely, and as soon as we possibly can. I will also emphasize, I think this is important, that we don't believe that this has any significant impact on the fundamentals of our business and the overall prospects of the company. We were really happy actually, and I know we'll talk more about this, we're really happy to be able to raise our top line guidance for the year for this fiscal year. Also, you know, reaffirm our long-term free cash flow outlook for fiscal year 2025 of $300 million plus of free cash flow.
Got it. Perfect. Maybe just let's take a step back. You know, Nutanix has been on this multi-year journey towards ACV and refining expansions of the product portfolio, helping bring kind of the operating and cash flow leverage you just spoke about. Just where do you feel like you are on this kind of transformation journey? Are you out of kind of the transformation phase and onto the selling phase?
Yeah. Thank you.
Scaling phase.
I actually think you characterized it quite well, Meta, in that we, you know, we do think that the transformation phase is behind us, and I'll clarify what I mean by that, and we are into the scaling phase.
Yeah.
90%+ of our business is subscription software that we sell. Our growth margins are in the low 80s%, which is a significant improvement from where we were several years ago. You know, the small remaining portion is professional services. When you look at that profile, that is very much like any, you know, most of the subscription software companies and what we're selling to our, to our customers. Our sellers have been sort of incentivized on annualized contract value, ACV model, as you alluded to, for several years now. That portion of this journey, I would say that as you characterized it, as the transformation phase is done. We are in a scaling phase.
For us, what that means is that we are now starting to see the benefits of that business model evolution. Renewals as an example, right? Because we are now, we've been selling term licenses, we are seeing an increasing waterfall of renewals that are coming up in the next several years, and that helps us, I think, on at least two fronts, right? One is in terms of growth. We've talked about how we expect for this year, for example, the significant majority of our growth in billings is expected to come from growth in renewals billings. That, I would say, is a lower risk...
Yeah
... top line growth than new and expansion, especially in this environment. We talked about that. In terms of growth, it's a driver for growth and somewhat lower risk growth. The second piece that the renewals growth helps us with is on efficiency and leverage. As you can imagine, it takes it's much more efficient for us to transact $1 of renewals versus $1 of new and expansion. That helps us as well. When you layer all of that along with the significant opportunity for new and expansion, that's sort of the point that we're at, right, in terms of what's to come from this evolution on both growth and efficiency.
Got it. We talked about you know, you just mentioned macro is obviously kind of more challenging for new business. You're seeing great renewals business. We're also seeing kind of a rationalization of cloud spend, which is kind of making people reevaluate their on-premise data centers or just kind of what their hybrid footprint is gonna be going forward. That would seem to be a great setup for an HCI company. Just what are those conversations like with customers, and is it creating kind of that inroads into customers as they go through these kind of cloud rationalization journeys?
Yes, it absolutely is an opportunity for us, right? Because we have been a leader in what you referred to as HCI, Hyperconverged Infrastructure, which is a great stepping stone, I would say, for an operating model that is a cloud operating model, regardless of whether your underlying workload is running in sort of a public cloud and hyperscaler environment or whether it's on-prem, right? For us, we've always believed that cloud is an operating model and not a destination. I know, you know, we'll talk some more later on, I think, about just how different ways in which people think about this. To your question on rationalization today, right, especially in this environment.
Yes
... we are seeing that. I think for us, we are there to help, you know, customers with making sure that their total cost of ownership and ROI is the most it can be in the environments they're in. If that means moving some workloads around, we believe we're the best platform for that because we make those movements, whether it's between private and public cloud, or whether that is in between public cloud, not just easier to do, right? It saves them effort, but it also saves them cost, right? There's a time and a cost element that we can make things easier for them to make those transitions.
I mean, do you feel like, you know, obviously we're seeing the cloud rationalization and that? I don't think everybody is clear on has that changed kind of the end state? I guess I'm just kind of asking, do you think customers have started thinking about the end state, or we're still in the, "I just need to rationalize spend right now"?
Yeah. I think there are actually, you know, as you can imagine, people that are in different parts of that journey.
Right.
I think there are some folks who are very much in the throes of, "Okay, I'm in cloud rationalization mode right now".
Right
... in a more reactive way, which is okay.
Yeah.
Right? We're there to go help those customers. There are also folks who are thinking about this in a more kind of strategic, longer term...
Mm-hmm
... way, which is not so much about near-term cost rationalization, but more about strategically what do I want my environment to be, right, in the medium term, in the long term. Do I want it to be, you know, a hybrid, depending on what the workload is and what I'm gonna need from it? Do I want it to be multiple public clouds.
Mm-hmm
right, or somewhere in the middle? We're having both those conversations. On the strategic side, I think where you were going, Meta, right, is if the customer is more saying, "Look, there's near-term things that are happening, we'll go figure that out." When I think more strategically about just what my operating model should be, one of the reasons I think we can differentiate ourselves is we're able to help them future-proof it.
Right.
there might be some CIOs who say today, "I'm not ready to make some kind of a significant change, but I know I'm gonna want to do that.
Yeah
... in a year or 2 years' time". Nutanix can help them really future-proof that because we can help them now from a very practical TCO perspective.
Right
... but we can also help them go on that journey, in the future, right? There's definitely That's a leading indicator for, I think, for them to say, "Well, why would I choose you?" Right?
Mm-hmm.
I think we are uniquely positioned 'cause we are on-prem, we can work across clouds, public clouds, when some of the other folks in the space have reasons, right.
Right
in one or the other.
Got it. I mean, maybe just kind of refreshing back to earnings on Monday, seems like a long time ago now. Just on kind of the macro impacts that you're seeing, I think you kind of described them across both the renewal business and the new business, but maybe just kind of refreshing, you know, where you're seeing it. Is it just longer sales cycles? Is there hesitancy to try out new products? Just where are you kind of seeing that within your portfolio?
Our renewals business has held up really nicely, right? Our GRR, which is gross retention rates, we've talked about that being 90%+, which continues to be the case, and just comes back to, I think, what I talked about earlier in terms of it just being more predictable, but also just these are deployments, we're often running mission-critical workloads for people, so it's going to not be easy for them to not renew, right? That's good. I think renewals continue to be healthy and strong. As we've talked about, the new and expansion side is where we had baked in some caution into our expectations.
What we saw that was probably new in this, in this earnings from two days ago as opposed to the previous quarter, was that previously we'd anecdotally heard about, you know, more deal inspections, things like that. In the January quarter, we actually did see some modest elongation of sales cycles. Just to define it for folks what we mean by sales cycles, we looked at all the transactions that happen in any given quarter and when were those opportunities created, right? How long did it go from opportunity creation to close. Those saw modest elongations. I wouldn't characterize them as drastic in any way.
Yeah.
we did see it across both kind of new logos that we were trying to win and with existing customers. This is all purely on the expansion side. Even with all that, I don't think that's unusual, Meta.
Yeah.
I'm hearing that from a lot of other companies in the space. I will say, look, as someone who does approve a lot of our spend.
Yeah
... we are asking those questions, right?
Right.
Like, I think that's absolutely appropriate for the environment, so we baked some of that into our outlook for the rest of the year. Even factoring that in, we were happy to be able to raise the top-line guidance.
I mean, I think obviously we've spent a lot of time talking about rationalization and macro and all these things, but you did kind of beat the quarter on the top line and were able to raise. Where are you seeing that kind of greatest source of upside?
Yeah. I think what we continue to see is kind of the fundamental value proposition, right? Like, for us, in our markets, we have. Even before kind of any of the near-term discussions I think a lot of people are having around TCO and ROI, that has been our value proposition from the get-go. Naturally, as I think folks can imagine, in an environment like this, that resonates with people, right? Like, if someone's gonna go say, "I need to go, you know, go transact," and, you know, on with Nutanix, we have a very strong proposition around TCO and ROI and benefits. I think that value proposition is resonating with people, which is great, right? I think when we talk about expansion, people are also seeing that play out for them, right?
Yeah.
When existing customers come back and buy more from us, it's because they have the proof point and they're, you know, I have to imagine, taking those to their decision-makers to say, "Look, look at all the benefits we've already obtained, and this is why we're gonna expand with this, with Nutanix as a vendor.
Another big opportunity investors have been pretty excited about for you guys is just the consolidation that's taking place within the space, or acquisition, that's taking place within the space. You know, just how do you position yourself best to take advantage of that opportunity, either through targeted initiatives, through hiring of salespeople? You know, what are all the different ways that you're kind of, putting yourself in the best position to take advantage of that?
Yes, it's a great question. This acquisition that I think you are referring to in the market of one of our competitors has been announced, right?
Yeah.
It's yet to be, yet to close. For us, what this has meant is it's an opportunity, just given some of the uncertainty surrounding that provider, to say, "Here is our value proposition. Here's why we are the right partner for our prospects and customers." We have been doing everything in our control to capitalize on that opportunity. What do I mean by that, right? This is a company that is not new to us, right? We have competed against them for a while. In that sense, our sellers absolutely know how to go-
Yeah
... you know, work those opportunities. It has opened some doors for us, right? That were previously, not quite as open because of what's going on with them, right? What we have done is, we've sort of created sort of campaigns, folks that maybe don't know about us as much to sort of create that awareness.
Also armed our sellers with tools around how can we make it easy for people to migrate, if that's what they're thinking about, right? There's a lot of that is, has gone on as well. I would say I think from the people side, you brought up that talent piece as well, Meta. We will continue to be opportunistic. Like, we have hired some great people in the market from this particular competitor, but I think just more generally, we'll be opportunistic. We are not planning to increase our sales rep capacity dramatically by any means, but we'll be opportunistic. Like, if a great talent out there, we'll absolutely want to get them in.
Got it. Yeah, because I think the biggest question that I have sometimes, and I know I've asked you this before, is you could spend a lot of effort kind of going after what is a very big install base of customers. Just how do you find what's the most effective way to say, "Hey, I'm just going to introduce myself?
Yes.
see, if I kind of get a bite on that," to, "Okay, these are what are the most actionable targets.
Totally agree. Like, we have to be smart about where we're spending our time, right?
Yeah.
I think you're absolutely right. I will also say that I think, you know, so some of those, some customers of this particular vendor, I think you're referring to, Meta, have also we understand, have signed, you know, renewals, right? With them to sort of buy themselves some time.
Yeah
... to go and understand what their options are. I think for us, we are thinking about which segments of the market we want to spend our time on. Like I said, there are some areas where doors were not open to us, that they are open now, and we fully.
Yeah
... intend to capitalize on that. There are places where we've always been in a motion where we're used to competing with other vendors. We'll let that continue. We are picking our spots in some ways. Where the customer said, "Look, I've signed a renewal with them for three years.
Yeah.
We will, of course, will stay in touch, but we may not amp up that effort until call it 18 months, 2 years from now".
Okay. Perfect. You know, you've had a number of changes to your sales force over kind of the past year or so. There's been turnover, changes at the chief revenue officer, a riff, you know, in addition to kind of supply chain disruption. Just how have you been able to manage to deliver like largely to plan over the last year with a lot of disruption, underneath the surface?
Yeah. I think some of those, I would say, like, you know, for example, you know, you mentioned our CRO. He has actually been with the company for six years, right?
Mm-hmm.
He was new to the role. Suddenly he.
Yeah
... promoted into the role, but is really sort of well-known inside the company and himself was very familiar with the strategy and the initiatives that are in place, right? In that sense, it was, it was an easier transition than if it was somebody that was hired from the outside. That I think is going well. He's got his leadership team in place, and so on. I think overall, I would just, you know, I do give, you know, I think Our teams have done an incredible job of executing in an environment that has been fluid, right? From a macro perspective, which I think a lot of folks are facing and navigating. To your point, some of the partner supply chain issues, which are one step removed from us.
Yeah
and we don't directly control. This is where I think we have talked about how one of our, you know, core value propositions is choice. How do we give our customers as much choice as we can to help them navigate this in a seamless way, right? We've simply sort of focused on things that we can control, and driven to those, Meta Marshall, and then also capitalized on just what are the strengths of our platform, right? I talked about before in terms of value proposition, helping companies digitally transform, future-proofing them, TCO, ROI. All of those things to me are, you know, evergreen value propositions.
Yeah
... right? That our teams continue to drive. Lastly, look, I think not to belabor this, but it does, you know, the renewals, the base has provided us with a nice foundation, right? That is relatively you know, resilient even in these because the supply chain things or the macro less impactful to that piece.
Got it. I think sometimes one of the things that I struggle with is, yes, you have this leverage coming from your business model for moving from TCV to ACV. If I were a sales rep, I would say, "Well, that just means I'm getting paid less on kind of this renewal business than I was getting paid on kind of a bigger transaction up front." What do I misunderstand about that in terms of, you know, how a salesperson is kind of incentivized the same but differently than they were before?
I think when we made this switch, this is now, you know, more than two years ago, right? This is the third year that our sellers are being incentivized on Annual Contract Value. We absolutely took into account all the points that you're rightfully making. If I am a seller, how do I make money and how can I still make as much or, you know, just feel like I can, I can win, right?
Yeah.
In this sales comp model. When we thought about that, we did a lot of actually work just going to other companies who have made this evolution, benchmarking and so on, to say, how do we make this model work for our sellers? Today, they are largely incentivized on new and expansion business, right? They also have, you know, a small incentive to focus on renewals. Why? Because renewals can be a great point or a point in time to go and have an expansion discussion, right? It's a natural touch point with the customer. So I would say, you know, at this point, you know, will we continue to kind of tweak our sales comp model and incentive model? Of course, we will. That's just normal, and all companies do that.
I think they are now at a place where they understand why this annualized model, right? While balancing kind of all the other things that a customer might want to do. The customer may still say, "I want a 5-year transaction or a 3-year transaction," because of how they are choosing to spend their dollars and their budget. We've tried to make it clear to our sellers, like, what are the levers that they have, right? To, one, make this work for the customer, but also to make it work for them from a incentive standpoint.
Got it. When we started, you talked about kind of the free cash flow targets that you guys have had and being able to maintain those, particularly in light of kind of the current audit committee investigation. Just where is that leverage coming from? Just given the uncertainty around the audit committee investigation, just what kind of gives you continued comfort in being able to achieve those?
I think the leverage overall, right, if I take a sort of a step back on the macro free cash flow number that we provided fiscal year 2025 is $300+ million, and then we said $100 million-$125 million for this fiscal year. You're right, Meta, it does factor in that number a potential impact from this review that's ongoing. We haven't quantified it, but I think we feel comfortable that that number works even with that impact. It also includes, I think, just for the full picture, right, two kind of $45 million of what I would characterize as non-recurring cash outflows that we expect in this quarter, right?
When you normalize that 100-125 for this $45 million on top of that, and then, and then, like I said, this potential impact, right? That gives you a sense of just what you should expect on a normalized basis.
Got it. You saw some supply chain challenges from server availability over the last year. I guess just trying to understand, is it customer server pre-preference? Like, given that you work on kind of any server, I think the question that we got was just what was the reason for kind of that why don't we just swap for something else? Or is there kind of a path to market that comes through those server vendors that we don't appreciate?
Got it. I should first start by saying that this is for those that, you know, may not be as familiar, right? This, this concept of the server availability refers to our partners, right? We don't, you know, sell hardware, as I mentioned earlier, right? Because we're an infrastructure software company, our software does run on underlying servers that our partners provide. What we saw, starting about two quarters ago was that because of the supply chain challenges that they were having, and this affects only the new and expansion portion of our business, not the renewals piece, which we've talked about, our customers were having challenges with procuring some of those servers to run our software on them.
As Meta pointed out, right, like, we do provide a wide variety of choice for customers, because we provide the software, and we want it to be able to run on most any platform. A couple of things were happening, right? One is that almost all of those vendors were seeing some degree of disruptions from supply chain back then. I do think it has improved since then, and we've talked about that.
Yeah.
in how that's impacting us as well, which is, which is good news. I think the more those resolve, the better it is. Secondly, there are some customers who want to stick to a certain platform for whatever reason, right? Our sellers are going to make it clear to them that they can use, you know, any other server partner who have more availability or less. In some cases, the customer.
Yeah.
may choose to stick to one or the other for whatever reason, whether they have a relationship or the way their systems are configured. In those instances.
Mm-hmm.
They did choose to say, "Look, you know, I want to buy Nutanix software, but my server is not coming until three months out, four months out in some cases." Of course, you know, we want that business. We would collect the bookings from them. It just meant that, you know, our revenue recognition for that can't begin until the actual license is activated. That was the dynamic that we've talked about in our earnings in terms of how that flows through the P&L. I do think this is something that'll resolve itself, right?
Yeah.
over time, and we've already seen improvements in the last couple of quarters.
Are there partnerships that are kind of important for you know, as you go to market?
Absolutely. I think we've talked about just our strategic partnerships as being really an important lever for us as we go to market. Some, you know, I'll talk about a few. If you think about Citrix and Red Hat, you know, important partnerships for us as we go to market with jointly with them. The Azure partnership is another important one I would highlight. In October, we announced the general availability of our cloud clusters product in partnership with Azure. That's relatively new to the market and going well because it's in the Azure Marketplace. People can use marketplace credits to use our product. I would say, I think, you know, these, you know, the partners we talked about from a server perspective, right.
Mm-hmm.
-are also important because in many cases we are sort of serving the customer, you know, jointly in those instances.
Got it. I wanna leave a chance for questions. Are there any questions from the audience? All right, perfect. I have plenty more. All right. You know, another dynamic of the past couple of quarters has kind of been this early renewals phenomenon that's maybe made modeling a little bit of a challenge or just kind of figuring out what growth rates are. Do you feel like we're getting to a more normalized place here where you've refined kind of in your forecasting how you think about those renewal timelines? Or how should we think about kind of this early renewals phenomenon going forward?
Yeah. No, it's a good question, Meta. I would say, like, when you think about renewals, and this is a more generalized view, right, of subscription software companies, not necessarily just us, is these renewals, you know, we know when they are coming due. We've talked about, you know, available to renew is what we call it. At the beginning of quarter, we know what renewals are available to renew and that are coming due in that quarter. Practically speaking, there are a few things that go in, right? Our renewals team will sometimes go and start that conversation with the customer up to six months in advance. We see that also, by the way, from vendors who sell to us, because you don't wanna wait to the last minute to go do that.
Some of these, like, federal customers, for example, have pretty long approval cycles and so on. You wanna get ahead of it. That also means that sometimes there's just what I would characterize as normal fluctuations in when those transactions close. We also do what we call co-terming, which is just, you know, again, as somebody who we also purchase, right, subscription software from other vendors, we can say that you'd like to have all of the licenses be co-termed to a single date because people buy a lot from us, right? Different products and different solutions.
Yeah.
Those are all I would characterize as normal variations, Meta, and those will continue. I would say they're. You know, at this point we are trying to get our teams to make sure there's not any kind of unusual movements. These are all, I think, normal levels of variability from quarter to quarter, which is, I think, as expected. I think overall we're happy with the levels that our renewals team is executing to.
Maybe just to sneak in one last one. You know, you're entering in it to a cash generative period. There's a lot of things you can do with your platform. Just how do you consider kind of yourselves doing M&A as a part of that strategy?
Yeah, look, I think we will be open to it. As you say, we are just earning the right, I think in my mind, to be able to do that, 'cause we've been very, very clear about sustainable and profitable growth as being our true north, and we're very happy with the record free cash flow margins we had in Q2. We will be opportunistic, and we'll be thoughtful. I think when you think about valuations in the market, I think public markets have seen obviously, a level of valuation change. I don't know if the public-private markets are necessarily, you know, we'll see how that plays out. We'll be thoughtful, about any potential acquisitions that we consider as we go forward here.
Great. Rukmini, thanks so much for being here with us today.
Thank you. Thanks for having me.