Hi all,
my conference call reviews on Nutanix. The last 3 (sort of 4) quarters are at the end, my interpretation of the Q+A.
Summary Q4 2018
I find Nutanix conference calls full of words and a bit light on information, but that might just be me. There are a reasonable number of responses where I had no idea what Dheeraj and Duston were talking about or how they related to the question. To be fair, a lot of the questions were a bit meh as well.
Nutanix are growing well. My take is that they’re winning a lot of deals, the transition to software is progressing without any real impediments, and their billings are growing.
IMO, there is a huge amount of stickiness in using Acropolis/Prism to manage your datacenter. Its a pretty big commitment, and you’re not going to swap out your operating system regularly, retrain everyone, etc.
So lock-in is a given. I’m not sure about the Federal side of things, but in NZ, once one government agency does something, the others feel like that option has been de-risked, and feel much happier about adopting it. I’m assuming something like that will happen in the US Federal vertical, which might make that a much larger vertical in the future.
On the downside, my reading is that they’re intending to build AWS 2.0, which is a significant software undertaking. And Dheeraj has repeatedly made odd comments about their ability to build software, a little at odds to their apparent success to date. I’m not sure exactly what that means, he’s obviously a technical guy, but… I’m not sure.
eg:https://www.bloomberg.com/news/articles/2018-04-27/nutanix-s…
and from Q1 2018 CC “And we do expect to actually change the way we do engineering. In these two pizza teams, like really thinking about cloud engineering, what does it mean to have a platoon of developers who are independently releasing code and becoming a company that’s more DevOps like, so that’s the transition that the company is going through to actually improve our overall fidelity of releases as well.”
These are old/more-or-less solved problems in software development, and am not sure what to make of it for a Cloud OS software company.
I think the Street was looking for some guidance as to when Nutanix will actually make money. But we got ‘We’re going to grow revenue and spend’.
Contrast the statements from Q3 and Q4 re: rule of 40
Q3-2018 “we would continuously trade off higher or lower revenue growth with corresponding lower or higher free cash flow and profitability (to target Rule of 40)”
Q4-2018 “… more likely all of the score coming from annual software and support revenue growth”
So lots of revenue growth for the foreseeable future, not profitability.
The other point is, they have a bunch of applications which aren’t doing much, and its unclear when/if they will be accretive to revenue. It sounds (to me) like Xi Cloud in particular is late, in Q3 Dheeraj said they were “fairly close”, and “Summer … start to see us report”, which hasn’t happened. So will have to wait and see over the next 2-4 quarters or even more (“fiscal 2021…”)
These products are part of the ‘expand’ of the land-and-expand approach. They seem to have a compelling product in Acropolis judging by their success to date, so its not quite clear to me how important these products are, versus expanding the Acropolis footprint.
Stock-based compensation is also high (15% of revenue), which means their non-GAAP numbers are a bit iffy.
All in all, theres a bunch of uncertainty around their future software plans. To me however, the amount of success they’ve had with their base product indicates a lot of demand in a very large market.
So I can understand the markets uncertainty, theres a lot to be uncertain about. Any slowdown in revenue growth I think will be hammered by the market.
But… that lock-in, and the very high demand are a pretty compelling story.
cheers
Greg
Q1 2018
Reviewed, but nothing I could see that wasnt already covered subsequently.
Q2 2018
Q: Hardware passthrough elimination?
A: Around 16%, good progress. Heavy lifting in international.
Q: You guys went with software only sales quota Feb 1. Hows that going?
A: More clarity for sales force. Pretty good shape.
Q: talk about Minjar ?
A: [GD: This is Beam]. Costing, budgeting, governance and compliance features. As well as migration service to migrate from on-prem to off-prem customer.
Q: Xi Cloud, launch mid-year. Even more aggressive move to ratable subscription revenue?
A: Lot of billings ratable today. Need to understand Xi a bit more.
Q: Whats a good gross margin exit for Q3? Fiscal 2019?
A: Don’t go out more than a quarter. Longer term, healthy software-type margins, 75-80%. At that point, 60+% software (at 100% margin). 30ish % support.
Q: Software transition. Impact on sales?
A: [GD: This is important] Larger deals because software appreciates and hardware depreciates. Why buy lots of hardware up front? Start small and grow over time.
[GD: This is a comment on being able to separate hardware and software sales]
Q: Motivation behind debt issue?
A: Great time to raise cheap money. No big M&A, more smaller deals.
Q: Grow software only 50+ percent (if you back out $10 million of product)? How confident in 40+ % yoy over next couple of quarters?
A: Q3 looking at 50% yoy. Adding back the $45m we’re eliminating, that yoy growth rate would be 60%. All healthy [GD: not sure this answers the question]
Q: support gross margin, last quarter you said mid-50%, but you did 63.5%. Whats the right number? And OpEx, $10m/qtr the right level?
A: OpEx about right. Support margin, mid 50s.
Q: Whats the mix of deployment on non SuperMicro (whitebox) hardware? Mix change?
A: 1/3 non super micro. Probably get to 50-50 in the next 18months or so.
Q: Europe, whats driving it?
A: Large deals from existing customers, brexit causing data center projects to come alive. Also, system integrators taking notice.
Q: Incremental new customer add strong, why? Profile of new buyer?
A: Mid market adds are strong. C-level people waiting to become mainstream, Gartner MQ caused our profile to be mainstream.
Q: VMWare? Mergers and reverse mergers, sounds like you’re not seeing much change. Nutanix at Dell?
A: Two OS’s in the market, VMWare and Nutanix. Dell gotten closer to VMware. Getting closer to (us) would be a smart strategy.
Q: Drill down into 5 $3m deals. Common themes/use-cases?
A: Really looking at Nutanix as a platform play. Gartner will help a lot, as well as NPS. So re-platforming the entire data center.
Q: Hiring priorites?
A: Increasing awareness of the company. R&D, but 18-19% of revenue.
Q: Reduction in channel friction now software only?
A: Early. Next 6 months but theory is it should reduce.
Q: How sustainable productivity saw this quarter? (behind on hiring, do you need to?)
A: [GD: Lots of words, not much answering question - poor question in general]
Q: Acropolis Hypervisor adoption uptick. Any new factors?
A: AHV caught up on features helped. Workload around replatforming the whole stack [GD: Didnt really understand the response]
Q: Gartner, 20% workloads on HCI by 2020. Your view?
A: Blurring the line between on and off prem where real money will be. [GD: Lots of words]. Very early days.
Q: VMWare has NSX for networking, you’re building in house. Is there a gap?
A: We dont think of network virtualization as a thing, its part of the entire OS. [GD: Many more words…]
Q3 2018
Q: Xi cloud and related on track? how do customers think, and how quickly might we get true application and data mobility? [GD - poor question]
A: [GD - lots of words] … Summer… “from there you will start to see us report about how many migrations…”.
Q: Scaling new sales teams. Segmentation?
A: Segmentation is a journey. Progress up the pyramid (commercial → enterprise → global).
Q: OEM portfolio, which getting most leverage. Also, international growth and new verticals?
A: Good partnerships across the board. Fujitsu in Japan and Asia. AIX with IBM.
Q: Steady state OpEx in fiscal 2019?
A: Q1 some chunky things. Highly correlated to billings performance.
Q: Gross margin guidance low? why would services head back to mid-50s?
A: Chuck other expenses into that bucket.
Q: Acceleration in software and support growth to 67% in the quarter. Because faster node growth, or higher attach software?
A: Big chunk is we can sell software at scale (independent of hardware), and not worry so much about hardware pricing.
Q: When will Xi, Calm, Beam, Flow, will ship? When contribute revenue?
A: Flow is general access [GD: Didnt really understand all the words here]. Era, GA end of year, Beam already GA’d. Good lessons to come.
Q: AI capabilities?
A: Goal is to make AI/ML accessible to customers. Project Sherlock [GD: Fill this in - what is it]
Q: Flash, flash vendors pivoting.
A: [GD: Didnt understand this at all]
Q: Pass through hardware for Fiscal Q4?
A: Pretty close to estimates. US done, europe well underway, APAC next.
Q: NVME?
A: [GD: Didnt understand this]. “We talk about how close can storage get to the application, because now its NVME your fabric, we actually need to bring it even closer to the application because at the end the day NVME is going to be that much faster and while we talking about 40 gigabit networks and 100 gigabit networks, still the commodity is 100 gigabit. And only in the last two years have people moved away 1 gigabit on board. Network cards to 10 gigabit now. So I think it’s a great opportunity. In fact, we can also virtualize the NVME over fabric protocol to be hyperconverged, which is again a very unique opportunity, the fact that you can have apps not going through NFS which was the tax that we had to pay for hypervisors. In the age we land I think when you look at our hypervisor, there is some immense opportunities to go and optimize the NVME or fabric kind of protocols.”
Q: AHV, you said significant part of larger deals. Why? Cost?
A: Nutanix is a premium product. Lot of adoption because we make things invisible (ie, not care about the hypervisor)
Q: New customer acquisition down (4% yoy). But you’ve announced larger deals. Change in focus?
A: [GD: Duston doesn’t really answer the question, talks about ‘re-focus’ on new customers, implying they were focussed on larger deals? Also talks about judging on a 6-month basis rather than quarterly (ie, Q1 and Q3 are slower)
Q: How far from the Cloud OS destination?
A: [GD: Dheeraj goes off on a comparison to MSFT in 1991] “A timeless path”
Q: Suprises positive and negative moving to software?
A: [GD: Dheeraj lots of words, not really answer the question]. Cons, we have to design the license models.
Q: Ballpark breakeven level from a revenue standpoint?
A: No. Lot of growth ahead.
Q: Bill to revenue ratio? DSOs (days sales outstanding)?
A: Bill to revenue, surprised to see over 1.3. Early to tell. DSOs relatively consistent. Bill to revenue ratio nothing to do with cashflow.
Q: Netapp talking about HCI, perspective on where the biggest competitors and new entrants are?
A: (As opposed to NetApp), we’re working on the problem of getting legacy apps to hybrid cloud, theyre assuming that work is done. Competition, lot of legacy to displace. We dont overly worry about them (competition).
Q: Analyst Day, $1.8b of $3b coming from non-global 2000 customers, implying a net add of 1000/quarter. Are you concerned transition to software hurt smaller customer growth?
A: Average over a 3.5 year period. Lets see what happens in Q4. [GD: Not revisited in Q4, will ask IR]
Q: Acropolis increasing, new or existing customers?
A: No data.
Q4 2018
Q: Breakeven point comparing (new licenses to old) [GD: he says perpetual to subscription, but NTNX doesnt have perpetual licenses]
A: 1,3,5 year license terms, expect most people to go for 3. Cloud consumption model lets you try it for a year.
Q: Deal sizes going up since transition?
A: No ELAs (Enterprise License Agreement), all term licenses. [GD: I assume this is a good thing?]
Q: How do you differentiate yourself from VMWare?
A: Close in rule of 40, but we’ve got much bigger growth rate. They’ve $40b install base, we’re $4b. Their tech is inside the kernal/hypervisor. We’re in the user space. They have perpetual licenses, we’re heading to subscription. They’re competitor obsessed, we’re customer obsessed. [GD: implies that VMWare has a different approach for each group of providers in the mix eg: Amazon, not Pivotal, not Dell then A, else if Not Amazon, Pivotal And Dell then B… lots of complexity.]
Q: OpExp growth though the year?
A: We’ll up our spend on new products. Stay within rule of 40 → implies all of the 40 will come from revenue growth.
Q: 1,3,5 year licenses, any other variants?
A: Maybe, looking at term and capacity.
Q: Where are you at with licensing?
A: 3rd party licenses been going for a while (eg: sell nutanix on top of Dell etc). New stuff will be white box (Supermicro). More insight Q1.
Q: How you view the hybrid cloud strategy of public cloud providers? eg: VMWare with AWS (RDS + VMware now), Azure stack, GKE on-premiuse.
A: Switzerland of servers. Design will win. Innovation will win. [GD: lots of words, but not much meat]
Q: Billings, large US DOD deal reflected in this quarters results?
A: Yes, all billed Q4. Only 40% recognised as revenue, rest over support quarter. Expecting more big deals.
Q: Guidance and backlog comment?
A: Guidance = happy. Backlog bounces around. Now backlog is mostly software and support.
Q: Products that become meaningful over next 12-18 months?
A: [GD: Dheeraj talks about iPhone… ]… Frame and Era - drive our core services.Others, including Beam, Calm, Sherlock, Epoch - take us to developers.
“The big goal of the company right now is to go to developers… can we bring a lot of open source stuff to them”.
[GD: This really sounds like they’re building AWS, which I guess is the logical end-game, an AWS that works on hybrid-cloud. Thats a big undertaking.]
Q: Does that (Frame) put you agaist Citrix?
A: No… Yes and no. Not a zero sum game. Massive opportunity.
Q: $3b 2021 target. How much from new products?
A: Blah blah word storm. Too early.
Q: Storage demand healthy, good numbers from Pure, net app etc. Competing architecturally?
A: Nutanix Files is our fastest growing product… lots more words, but I think he says they don’t really care about storage, because hardware will be completely commoditised.
Q: Hardware runoff hit, but gross margin beat guidance. How come?
A: Support margins better, some internal opps costs.
Q: 710 global 2000 customers, can continue to add 30-40 /quarter?
A: In our 2021 map, 30-35. [GD: lots more words about account managers].
Q: Navigating the current installed base to the new model?
A: As Xi picks up in next 12 months, have more clarity. A big push to tell them that you want portable licenses.