Nutanix, Inc. (NASDAQ:NTNX) Q1 2023 Earnings Call Transcript November 30, 2022
Nutanix, Inc. beats earnings expectations. Reported EPS is $0.03, expectations were $-0.12.
Operator: Good day and thank you for standing by. Welcome to Nutanix's Fiscal First Quarter 2023 Conference Call. I would now like to hand the conference over to your speaker for today, Rich Valera. You may begin.
Rich Valera: Good afternoon and welcome to today's conference call to discuss the results of our fiscal first quarter of 2023. Joining me today are Rajiv Ramaswami, Nutanix's President and CEO; and Rukmini Sivaraman, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing financial results for its fiscal first quarter of 2023. If you would like to read the release, please visit the Press Releases section of our IR website. During today's call, management will make forward-looking statements, including statements regarding our business plans, strategies, initiatives, vision, objectives and outlook including our financial guidance as well as our ability to execute hereon successfully and in a timely manner and the benefits and impact thereof on our business, operations and financial results, our financial performance and targets and use of new or different performance metrics in future periods, expectations regarding profitability, our competitive position and market opportunity, the timing and impact of our current and future business model transitions, the factors driving our growth, macroeconomic, geopolitical and industry trends, including global supply chain challenges and the current and anticipated impact of the COVID-19 pandemic and related effects.
These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. For a more detailed description of these and other risks and uncertainties, please refer to our SEC filings, including our annual report on Form 10-K for fiscal year ended July 31, 2022 as well as our earnings press release issued today. These forward-looking statements apply as of today and we undertake no obligation to revise these statements after this call. As a result, you should not rely on them as representing our views in the future. Please note, unless otherwise specifically referenced, all financial measures we use on today's call, except for revenue, are expressed on a non-GAAP basis and have been adjusted to exclude certain charges.
We have provided, to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release. Lastly, Nutanix management will be participating in the Raymond James Technology Investors Conference in New York on December 6 and the Barclays Global TMT Conference in San Francisco on December 7. Nutanix will also be holding an Investor Day in New York City on Tuesday, April 4, 2023. So please save the date and we'll be following up with more details in the coming weeks. And with that, I will turn the call over to Rajiv. Rajiv?
Rajiv Ramaswami: Thank you, Rich and good afternoon everyone. Against a volatile macro backdrop, we delivered a good first quarter. We exceeded all of our guided metrics and saw continued strong performance in our renewals business. Supply chain constraints with our server partners while remaining a headwind improved somewhat compared with the prior quarter. With respect to the macro backdrop, in our first quarter, we continue to see businesses prioritizing their digital transformation and data center modernization initiatives enabled by our platform. We have seen anecdotal evidence of increased inspection of deals by customers, which we believe is likely related to the more uncertain macro backdrop. We continue to factor this uncertainty into our outlook for the remainder of the fiscal year.
Taking a closer look at the first quarter, we delivered ACV billings and revenue above our guidance, driven by strong continued performance of our renewals business. We again demonstrated good expense management coming in slightly below our OpEx targets. Top line outperformance, combined with diligent expense management, enabled us to achieve positive non-GAAP operating income for the first time, another milestone in our drive towards sustainable, profitable growth. Finally, strong billings linearity and collections contributed to generation of $46 million of free cash flow, meaningfully exceeding our breakeven target and continuing our strong recent free cash flow performance. Overall, I am pleased with our financial performance in the first quarter.
Our first quarter is typically a stronger one for our federal business and this one was no exception. Our largest customer in the quarter was a federal civilian agency that was already a significant user of Nutanix's cloud platform, including our unified storage and database automation solutions as well as Nutanix Cloud Clusters or NC2, on AWS for bursting additional resource capacity into the public cloud. This customer added additional cybersecurity workloads to the Nutanix Cloud Platform, reflecting their confidence in the ability of our platform to handle their most business-critical applications and resulting in a substantial expansion order for us. We see this customer as a great example of how we are able to land and expand with some of the largest organizations in the world.
On the product and partnership front, we achieved an important milestone in realizing our hybrid multi-cloud vision with the general availability of NC2 on Microsoft Azure. Now with support of AWS, Azure and service provider cloud environment, we continue to deliver on our hybrid multi-cloud vision. Our customers have the ability to rapidly and seamlessly shift their workloads between their private clouds and the largest public cloud providers, with a consistent management, governance and data services provided by the Nutanix Cloud Platform, all without the time and expense of refactoring their workloads. One of our early customers for NC2 on Azure is Unum Group, a Fortune 500 financial services provider, who is part of our customer preview program.
Unum chose NC2 on Azure, because they were looking to leverage our seamless hybrid multi-cloud platform for disaster recovery as well as to migrate and run their workloads in Azure without having to refactor their applications. They are also looking to take advantage of the ability to expand their Nutanix cloud platform to different Azure regions on demand. Another exciting development on the product front is the recent enhancements we made to our platform to accelerate adoption of Kubernetes-based applications in the enterprise. In keeping with our philosophy of offering customers choice throughout the stack, we added Amazon's Kubernetes service to an already long list of supported Kubernetes container platforms, including Red Hat, OpenShift, SUSE Rancher, Google Anthos, Azure Arc and our native Nutanix Kubernetes Engine.
We also added built-in infrastructure as core capabilities and advanced cloud-native data services for modern applications, both of which will enhance the Nutanix cloud platform's ability to efficiently run Kubernetes applications at scale. Go-to-market leverage is one of my top priorities and we saw progress across a number of partner categories in the first quarter. In the public cloud category, our customers are now able to get on-demand consumption of Nutanix software through Azure marketplace, facilitating frictionless license procurement and movement of workloads between private cloud and Azure. For our channel partners, we updated our Elevate Partner Program ecosystem, which enhanced incentives to encourage and enable these partners to sell Nutanix into net new accounts and to drive opportunities through the entire sales cycle autonomously.
In addition, we rolled out training designed to enable partners to speed up sales cycles through rapid capacity planning, quoting and order fulfillment, thereby generating more leverage for our sales rep. Finally, our two largest new customer wins in the quarter were in partnership with a global leader in data center colocation and interconnection services and part of our service provider program. We are encouraged by the early progress we are seeing with service providers and see good growth potential in our service provider-related businesses as we add additional partners and enhancements to our platform, supporting service provider business models. One of these service provider wins was from an EMEA-based publishing and education company that was looking to modernize and consolidate their data center footprint while having disaster recovery capability in AWS.
They chose our Nutanix cloud platform, including Nutanix cloud management to run their business-critical applications, leveraging its simplicity and built-in automation for Infrastructure as a Service. They also added Nutanix unified storage to service their unstructured data needs. We see this as a great example of a customer adopting our full stack offering to consolidate and modernize their IT infrastructure. And now, I'd like to talk about the industry recognition we continue to receive for our solutions. For the second year in a row, Nutanix was named a visionary in Gartner's Magic Quadrant for Distributed File Systems and Object Storage. We believe our improved position within the Visionary Quadrant this year reflects advances in customer traction, go-to-market efforts, enhanced product capabilities, and an expanded ecosystem for our Nutanix unified storage solution.
With customers needing a simple and secure way to manage and protect their data, this recognition highlights the advantages of Nutanix unified storage. In closing, I'd like to provide some thoughts on our priorities and outlook. First, our overarching priority remains driving towards sustainable profitable growth through judicious investment in the business, execution on a growing base of renewals, and diligent expense management. Our achievement of positive non-GAAP operating income in the first quarter represents tangible progress towards this goal. The strength of our business model is underpinned by a growing base of renewals and the strong value proposition of our platform in an uncertain macro landscape. I remain confident in our ability to continue to capitalize on the vast opportunity in front of us while driving towards sustainable, profitable growth.
And with that, I'll hand it over to Rukmini Sivaraman. Rukmini?
Rukmini Sivaraman: Thank you, Rajiv. I will first walk through our Q1 results, followed by our outlook for Q2 and then finally, provide an update on our fiscal year 23 outlook. Q1 23 was a good quarter with results that came in better than our guidance and across all guided metrics. ACV billings in Q1 was $232 million, higher than our guidance of $210 million to $215 million and representing a year-over-year growth of 27%. A significant majority of that growth came from growth in renewals billings. Revenue in Q1 was $434 million, higher than our guidance of $410 million to $415 million and a year-over-year growth rate of 15%. ARR at the end of Q1 was $1.281 billion, a year-over-year growth of 34%. New logo additions were about 530 in Q1.
Contract duration decreased quarter-over-quarter to 3 years as expected, partly due to a seasonally higher mix of U.S. federal business that typically has shorter contract durations. As described previously, the percentage of orders with future start dates continue to be a key assumption in our Q1 guidance. This percentage came in lower than it was in Q4 22 and slightly below our expectations. Q1 revenue also benefited approximately $12 million from the improvement in percentage of future start dates from Q4 to Q1 as more license revenue was recognized in quarter than deferred. Non-GAAP gross margin in Q1 was 83% because of our higher-than-expected revenue performance. Non-GAAP operating margin in Q1 was positive 2%, our first quarter of positive non-GAAP operating profit and a proof point of our ongoing focus on profitable growth.
Non-GAAP operating expenses in Q1 were $351 million, better than our guidance of $360 million to $365 million, and included about $2 million of benefit from favorable currency exchange rates in the quarter. Non-GAAP net income was $8 million or EPS of $0.03 per share based on weighted average shares outstanding of approximately 275 million shares. We are happy to report positive net income and EPS for the first time in the history of Nutanix. Billings linearity was very good in Q1 and better than our expectations. DSOs were 18 days in Q1, a demonstration of good linearity and strong collections. We expect DSOs to trend back up to historical levels going forward. The strong billings linearity and collections contributed to free cash flow generation of $46 million in Q1, significantly better than our expectations.
We also collected in Q1 about $10 million of invoices due in early Q2. We are finding that while our cash collections remain strong, there is a normal level of variation in timing of payments from quarter-to-quarter. Going forward and given our transition into positive free cash flow generation, we expect to provide color on free cash flow on an annual basis. A brief note on severance payments related to our reduction in force that we announced in August. One, we expect the severance payments to total about $17 million rather than our previously estimated range of $20 million to $25 million; and two, about $6 million of the approximately $17 million in severance payments are being delayed to Q2, mainly in non-U.S. regions when we had previously assumed that the full amount would be paid in Q1.
We ended Q1 with cash, cash equivalents and short-term investments of $1.388 billion, up slightly from $1.324 billion in Q4 22. Moving on to Q2 outlook. The guidance for Q2 23 is as follows: ACV billings of $245 million to $260 million, implying a year-over-year growth rate of 13% at the midpoint. Revenue of $460 million to $470 million, a year-over-year growth of 13% at the midpoint, non-GAAP gross margin of 82% to 83%, non-GAAP operating margin of approximately 5% to 10%, weighted average shares outstanding of approximately 279 million shares. I'll now provide some more context around our Q2 guidance. First, the top line guidance for Q2 assumes that supply chain dynamics for our server partners would remain more or less the same compared to Q1 23.
Second, it assumes that contract durations would stay approximately flat in Q2 23 compared to Q1 23. Third, the revenue guidance includes approximately $10 million of revenue benefit from the decline in percentage of orders with future start dates over the last few months. Said differently, we expect to recognize more license revenue in Q2 than is deferred similar to the dynamic we saw in Q1. Over time, as our partner supply chain constraints resolve and our future start date percentages normalize, we would expect this dynamic to normalize as well. I will now provide an update on our full year 2023 guidance. While we had a good Q1 and our renewals business continues to provide a strong foundation for growth and efficiency, the macro environment remains uncertain, and we believe it is prudent to remain cautious in our full year top line guide, which remains unchanged.
We also remain focused on disciplined expense management and are, therefore, raising our operating margin and free cash flow outlook for the year. Our guidance for full year fiscal year 2023 is as follows: ACV billings guidance remains unchanged at $895 million to $900 million, year-over-year growth of 19% at the midpoint. Revenue guidance remains unchanged at $1.77 billion to $1.78 billion, year-over-year growth of 12% at the midpoint, non-GAAP gross margin of 82% to 83% and non-GAAP operating margin of 2% to 4%. I'll now provide some color on our full year guidance. First, similar to our comments last quarter, the full year guidance assumes that contract durations would decrease slightly compared to fiscal year 22. The fiscal year 23 revenue guidance also assumes that the percentage of orders with future start dates would remain more or less the same in Q2 compared to Q1 and would start to ease slightly in the second half of the fiscal year.
Second, the demand for our solutions continues and we are seeing continued new and expansion opportunities. However, as Rajiv mentioned, we have started to see some anecdotal evidence of increased inspection on deals which we believe is likely related to the more uncertain macro backdrop and which could potentially lead to an increase in sales cycles. We have considered this dynamic and the uncertain macro environment in our guidance. We expect that the significant majority of our growth in ACV billings for fiscal year 23 will come from growth in renewals ACV billings. With the uncertainty in the macro environment factored into our expectations for new and expansion ACV billings. At the same time, our continued focus on expense management and operating discipline enables us to increase our operating margin and free cash flow outlook for the year.
Which is a good segue to the third point, which is that we expect to deliver about $100 million to $125 million of free cash flow for fiscal year 23, an increase from our prior expectations of $75 million to $100 million. Finally, a note on seasonality. As we look ahead to the second half, we expect to see a low double-digit percentage decline quarter-over-quarter in ACV billings in the third quarter followed by a low double-digit percentage increase quarter-over-quarter in ACV billings in the fourth quarter. In closing, we are pleased that our Q1 results reflect our continued execution towards our stated objective of sustainable, profitable growth, and we expect to continue that focus. We look forward to sharing more about our medium-term outlook during our Investor Day in April 2023, as Rich referenced.
With that, operator, please open the line for questions.
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