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Nutanix CEO: Demand ‘has been fairly resilient’

Nutanix CEO & President Rajiv Ramaswami joins Yahoo Finance Live to discuss earnings, the subscription business model, and demand.

Video Transcript

BRAD SMITH: Shares of Enterprise Cloud platform Nutanix currently are moving after its stock shot up as much as 21% yesterday. The company reported a beat on earnings, strong revenue, and delivered optimistic guidance in its fourth quarter report. It's added on to some of those gains post the report dropping. This is as corporate IT spending remains resilient.

CEO Rajiv Ramaswami joins us now to add context to the company's performance. Rajiv, great to have you here with us. Help us break down the report a little bit more here. What was one of the main catalysts for this quarter?

RAJIV RAMASWAMI: Yes, thank you. So as you know, we've been going through a journey of moving to a subscription company. And we're starting to see the renewals base continuing to build up here quite substantially. We started this journey three years ago, and now we're seeing the fruits of it. As our renewals business goes up, it gives us both top line growth and bottom line leverage.

And we saw that happening this last quarter as well, very strong quarter for renewals. The quarter came in above expectations. And we had free cash flow positivity for the full year and for the quarter and for the first time since we started our subscription journey. And of course, revenue was up and our guide going forward is also predicting continued growth and free cash flow positivity and continued improvements in operating margin.

BRIAN SOZZI: Rajiv, why? It feels like over the past month, all I've just heard is earnings calls about companies cutting this, not doing this, this not making expectations, enterprise pulling back. I mean, your quarter really stood out here.

RAJIV RAMASWAMI: Yeah, and what we do for customers is customers are going digital, right? Every company is going digital. They're looking to modernize their infrastructure. They're looking to use public clouds. And we help them do that and manage a distributed workforce. And so our demand environment has been fairly resilient so far. We haven't seen that slowdown that some of the other companies have put out yet. So our demand continues to be stable. And customers continue to buy our products. The net promoter score continues to be very high. So that's been benefiting us so far.

BRIAN SOZZI: You know, just given the partnerships and the deals that you have been inking and expanding on, do you see profits next year?

RAJIV RAMASWAMI: Yes, absolutely. We were free cash flow positive already for the previous year that just ended. And we guided to being both free cash flow positive, 7,500 million, and positive non-GAAP operating income for the coming fiscal year.

BRAD SMITH: In terms of the sizes of the companies and that contributing to the free cash flow positivity, give us a sense of the average size of the companies that you're working with, and particularly, as you're shifting to a subscription-based business, where you're seeing even more of that not just revenue come in, but the contribution to those profit margins.

RAJIV RAMASWAMI: Absolutely. So today, we have about 22,000 plus customers across all verticals, across all segments. They range from the very top of the pyramid, Fortune 50, Fortune 100, to all the way down to smaller and mid-sized companies. So it's a pretty broad range, serving across every vertical. Now, in terms of the key to the free cash flow positive and profit growth is the renewables business. So about three years ago, we started this journey of moving the company to a completely subscription model. And so for the first few years, we are largely selling new subscriptions.

And then as customers adopt and those subscriptions start coming up for renewal, now we get this cushion of renewals business building up. And so now we've got this growing base of renewals. Last fiscal year was the first real big year for renewals. And those renewals can be prosecuted at very low cost, right? Because I mean, customers like the product. They use it. We are used for mission critical applications.

And so those renewals come in without us having to spend a lot of money on sales and marketing for it. And they provide both top line growth and they provide leverage to the bottom line, which is what is driving the operating income and profits. And at the same time, we've been very diligent about managing our costs.

BRIAN SOZZI: Rajiv, just given the pullback in terms of valuations in tech, we've been hearing from a lot of folks lately that we could see a pickup in M&A. Now that you have a much higher stock price, a higher currency to use, do you see yourself making deals?

RAJIV RAMASWAMI: Look, I mean, we are continuing to focus on organic growth at this point, largely speaking. Of course, we've got $1.3 plus billion worth of cash on the balance sheet. And the market is presenting some attractive targets out there. But largely, we are focused on an organic path forward. We may do tuck-ins here and there as opportunities come up, but largely organic growth at this point.

BRAD SMITH: And with that organic growth, you have seen some slightly higher kind of costs of those revenues. And so where do you believe that will start to stabilize? When do you believe that might start to stabilize as well, especially as we're kind of looking at the comps year over year, and in one year, it's more of a product-based business versus now, bringing more of a service-based business?

RAJIV RAMASWAMI: Well, I mean, we are a subscription-based business is the way I would call us.

BRAD SMITH: Subscription, yes.

RAJIV RAMASWAMI: Yes, and our sales and marketing spend as a function of revenue is coming down every year, year after year. It came down this year compared to the last year. We've been doing that. And again, the key there is the renewals growth, right? So for most subscription companies, it's a mix of renewals and new subscription. And the new subscriptions cost more from a sales and marketing perspective.

The renewals business comes in at a much lower cost. And as the renewals business grows, which it continues to grow very nicely, and with very high renewal rates and high customer satisfaction, that provides a lot of leverage to the bottom line and helps take that sales and marketing number lower as a function of revenue.

BRIAN SOZZI: All right, let's leave it there. Nutanix CEO Rajiv Ramaswami, good to see the turnaround. We'll talk to you soon.