Nutanix, Inc. (NASDAQ:NTNX) Q2 2024 Earnings Call Transcript
Nutanix, Inc. (NASDAQ:NTNX) Q2 2024 Earnings Call Transcript February 28, 2024
Nutanix, Inc. misses on earnings expectations. Reported EPS is $0.1099 EPS, expectations were $0.29. Nutanix, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Nutanix Second Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation there’ll be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Rich Valera, Vice President of Investor Relations. Please go ahead.
Rich Valera: Good afternoon and welcome to today's conference call to discuss second quarter fiscal year 2024 financial results. 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 second quarter fiscal year 2024 financial results. If you'd 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 financial guidance. 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, 2023 and our subsequent quarterly reports on Form 10-Q, 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.
Nutanix will be participating in the Morgan Stanley TMT Conference in San Francisco on March 6th. We hope to see some of you there. Finally, our third quarter fiscal 2024 quiet period will begin on Tuesday, April16th. And with that, I’ll turn the call over to Rajiv. Rajiv?
Rajiv Ramaswami: Thank you, Rich. And good afternoon, everyone. We've delivered a solid second quarter, with results that came in ahead of our guidance. The macro backdrop in our second quarter remain uncertain, but stable relative to the prior quarter. We continue to see steady demand for our solutions driven by businesses prioritizing their digital transformation and infrastructure modernization initiatives and looking to optimize their total cost of ownership or TCO. Taking a closer look at the second quarter, we were happy to have exceeded all of our guided metrics. We delivered record quarterly revenue of $565 million and grew our ARR 26% year-over-year to $1.74 billion. We also had another quarter of strong free cash flow generation.
Finally, we achieved quarterly GAAP operating profitability for the first time in Q2, demonstrating the progress we continue to make on driving operating leverage in our subscription model. Overall, our second quarter financial performance reflected continued discipline execution. Our largest wins in the quarter demonstrated the appeal of the Nutanix cloud platform to organizations that are looking to adopt hybrid multi cloud operating models optimize the performance of their workloads and improve their TCO all while managing through some of the disruption from recent industry M&A. A good example is a seven figure win with a global EMEA based provider of automotive technology solutions. This new customer had an existing three tier footprint in need of a refresh, but was frustrated by the recent price increases of their incumbent vendor and was also looking to have the flexibility to potentially move some of their footprint to the public cloud in future.
They chose our Nutanix Cloud Platform, including our AHP hypervisor, as well as Nutanix Cloud Management, based on its superior TCO, built-in automation for infrastructure as a service. And its ability to seamlessly transition workloads to public cloud via our NC2 solution. We see this win as a good example of the value customers see in our cloud platform for both, modernization and providing a seamless pathway to the public cloud. A second good example is a win with a large North American based hedge fund, that was looking to mitigate the growing cost of its public cloud hosted virtual desktop infrastructure or VDI. And for a more responsive solution to meet the performance demands of its traders. They chose to repatriate their VDI onto the Nutanix Cloud Platform on GPU based servers.
Resulting in a meaningful improvement in performance and an estimated 60% plus TCO savings. We believe this win demonstrates the ability of the Nutanix Cloud Platform to seamlessly run and manage workloads wherever the optimal performance and TCO can be achieved, whether on premise, at the edge or in the public cloud. A final example if one of our largest new customer wins in the quarter, with a global airline based in the EMEA region that was looking to modernize their feature infrastructure, while enabling a hybrid multi cloud environment. This customer chosen Nutanix Cloud Platform, including Nutanix Cloud Management to run their business critical application, leveraging its simplicity and built-in automation for infrastructure as a service.
They also adopted Nutanix database service for managing and deploying their databases throughout their organization, and Nutanix unified storage to service their unstructured data needs. We see this win as evidence of the value companies see in adopting our full stack solution. Moving on, adopting and benefiting from generating AI, is top of mind for many of our customers. As such, interest remains high in our GPT in-a-Box offering, which enables our customers to accelerate the use of generative AI across their enterprises, while keeping their data secure. Last quarter, we saw our first win for GPT in-a-Box with a large federal agency. In this quarter, we saw multiple additional wins for a Gen AI ready infrastructure offering. While it's still early days, and the numbers remain small, I'm excited about the longer term potential for GPT in-a-Box.
Finally, on the partner front, I'm happy with the early progress we're seeing with our Cisco partnership. We continue to see good customer interest in our joint offering and saw additional wins for it in the second quarter. While it's still early in this partnership, I'm encouraged by what we've seen so far. In closing, we are encouraged that the compelling value proposition of our cloud platform and the strength of our business model enable us to increase our top and bottom line outlook for fiscal 2024. We remain focused on delighting our customers while continuing to drive sustainable, profitable growth. And with that, I'll hand it over to Rukmini Sivaraman. Rukmini?
Rukmini Sivaraman: Thank you, Rajiv. I will first review our Q2 fiscal '24 results, followed by guidance for Q3 fiscal '24. And finally provide an updated view of our full year fiscal year '24 guidance. Results in Q2 '24 came in higher than the high end of our range across all guided metrics. ACV billings in Q2 were $329 million above the guided range of $295 million to $305 million representing year-over-year growth of 23%. The outperformance was driven by better than expected renewal performance due to a combination of good discipline around renewals economics, improved on time renewal performance, as well as early and core term renewals. Revenue in Q2 was $565 million, higher than the guidance range of $545 million to $555 million and the year-over-year growth rate of 16%.
ARR at the end of Q2 was $1.737 billion representing year-over-year growth of 26%. In Q2, we continue to see modestly elongated average sales cycles compared to historical levels. Average contract duration in Q2 was 2.8 years, slightly lower than Q1, and more or less in line with our expectations. Non-GAAP gross margin in Q2 was 87.3%. Higher than our guided range of 85% to 86%. Non-GAAP operating margin was 21.9%, higher than our guidance range of 14% to 16%, largely due to higher revenue and lower operating expenses as a result of timing of hiring. Non-GAAP net income was $136 million, or fully diluted EPS of $0.46 per share based on fully diluted weighted average shares outstanding of approximately 299 million shares. Q2 marked our first ever quarter of positive GAAP operating income of $37 million and a positive GAAP net income of $33 million, with fully diluted GAAP EPS of $0.12 per share.
Given expected variability in quarterly revenue and timing of expenses, we would not expect to be consistently profitable at the GAAP operating profit level over the near term. DSOs based on revenue and ending accounts receivable were 31 days in Q2. Free cash flow in Q2 was $163 million, representing a free cash flow margin of 29%, higher than our expectations due to higher billings and lower expenses in the quarter. We ended Q2 with cash, cash equivalents and short term investment of $1.644 billion up from $1.571 billion at the end of Q1. We continued repurchasing shares in Q2 under the share repurchase program, previously authorized by our Board of Directors. Our sustainable generation of free cash flow enabled us to transition the net share settlement to pay for employees' tax liability on RSU Vesting in Q2, and going forward from our previous method of sell to cover.
This, along with our share repurchase program will help us continue to manage dilution. Moving to Q3 '24, our guidance for Q3 is as follows: ACV billings of $265 million to $275 million, revenue of $510 million to $520 million, non-GAAP gross margin of approximately 85%, on-GAAP operating margin of 7.5% to 8.5%. And fully diluted shares outstanding of approximately 301 million shares. The updated guidance for full year fiscal year '24, which is higher than our previously provided fiscal year '24 guidance across all metrics is as follows; ACV billings of $1.09 billion to $1.11 billion, representing a year-over-year growth of 15% at the midpoint of the range. Revenue of $2.12 billion to $2.15 billion representing a year-over-year growth of 15% at the midpoint.
Non-GAAP gross margin of 85% to 86%. Non-GAAP operating margin of 12.5% to 13.5%. Free cash flow of $420 million to $440 million, representing a free cash flow margin of 20% at the midpoint. I will now provide some commentary regarding our updated fiscal year '24 guidance. First, we are seeing continued new and expansion opportunities for our solutions despite the uncertain macro environment. However, as we mentioned previously, we have continued to see a modest elongation of average sales cycles relative to historical levels. Our fiscal year '24 new and expansion ACV performance outlook assume some impact from these macro dynamics. We are also seeing a higher mix of larger deals in our pipeline, which is driving greater variability in the timing of our new and expansion business.
Second, the guidance assumes that our renewals business will continue to perform well. Third, the full year guidance continues to assume that average contract duration would be flat to slightly lower compared to fiscal year '23, as renewals continue to grow as a percent of our total billing. Fourth, a reminder that the full year ACV billing is not the straight sum of the ACV billings of the four quarters due to contracts with duration less than one year. We expect full year ACV billings to be about 5% to 6% lower than the sum of the four quarters ACV billings. In closing, we are pleased that our Q2 results exceeded guidance and to raise our top line and bottom line guidance for the full fiscal year. We remain focused on driving growth to capture the significant opportunity ahead of us and are investing prudently for that growth, consistent with our stated philosophy of sustainable, profitable growth.
With that, operator, please open the line for questions.
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