Ladies and gentlemen, thank you for standing by and welcome to the Nutanix Q2 Fiscal 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today Tonya Chin, Vice President of Investor Relations and Corporate Communications. Please go ahead, madam.

Good afternoon and welcome to today’s conference call to discuss the results of our second quarter of fiscal 2020. This call is also being broadcast over the web and can be accessed in the Investor Relations section of the Nutanix website. Joining me today are Dheeraj Pandey, Nutanix’s CEO; and Duston Williams, Nutanix’s CFO. After the market closed today, Nutanix issued a press release announcing financial results for the second quarter of fiscal 2020. If you’d like the release, please visit the Press Releases section of the Nutanix website. During today’s call, management will make forward-looking statements regarding our business plans and financial targets in future periods, the timing and impact of our transition to a subscription business model, the factors driving our growth and the benefits and capabilities of our new and existing products. These forward looking statements involve a number of 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 detailed description of these factors, please refer to our SEC filings including our most recent quarterly report on Form 10-Q as well as the earnings press release. These forward-looking statements apply as of today and we undertake no obligation to update 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 today are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We provided to the extent available reconciliations of these non-GAAP financial measures to GAAP financial measures in the Investor Relations section of our website and in our earnings press release. Turning to our upcoming conferences, Nutanix management will be at the Morgan Stanley, TMT Conference on March 2 and the KeyBanc Emerging Technology Summit on March 3. Both conferences are in San Francisco. We hope to see many of you there. Lastly, we’ll be hosting our Investor Day 2020 in New York City on Thursday, March 26. The event will be webcast or on our Investor Relations website. Institutional investors and analyst interested in attending in person should contact IR at Investorday@nutanix.com for registration information. And with that, I’ll turn it over to Dheeraj.

Thanks, Tonya. Q2 was another strong quarter and I’m pleased to see continued execution from across our organization. Our TCV billings came in on the high end of our guidance range and our TCV revenue gross margin and EPS all exceeded our guidance despite a softer US federal business. Further our deferred revenue surpassed a $1 billion for the first time this quarter growing 35% year-over-year. Business is robust and our transition is well ahead of our internal plans. But we’re also in an environment that is more key due to the impact of the Coronavirus. Dealing with the unknown for the first time in the company’s decade long history hence we’re cautious about our second half guidance which Duston will delve into soon. Since we began our transition to a subscription business model in Q1 of FY 2019. We’ve regularly highlighted the areas of a business that are evolving along the way. After another strong quarter of progress I would like to emphasis few areas of the business that stood out in the quarter. First was a faster than expected transmission to subscription. Second, our growing number of large deals and the continued adoption of new products and solutions beyond our core. Third, the momentum we’re seeing in a commercial business and finally, our promising partnership with HPE which continues to bring us new customers and once again outperformed our expectations during the quarter. A key driver for our improved sales execution over the past year has been the strong leadership of Chris Kaddaras in the Americas and EMEA in the years before that. Chris joined us as an EMEA sales leader more than three years ago, right around when we went public. We were tiny company back then almost one-third the revenue, one-fourth the number of customers, an…

Thank you Dheeraj. In Q2 we made outstanding progress on our continued shift to a subscription business. Subscription billings increased significantly and now account for 79% of total billings up from 73% in Q1. And subscription revenue now accounts for 77% of total revenue and that’s up from 69% in Q1. We repeatedly stated that it’s our desire to move forward through the subscription transition as fast as possible as we made great progress on this goal in the quarter. Our execution in this area far exceeded our expectations in Q2 significantly surpassing our FY ‘20 Q4 goal of 75% and almost equaling our stated CY ‘21 goal of 80% mentioned at least year’s Investor Day. It should come as no surprise that the short-term downside to this faster than expected push to subscription is the impact of the top line. Based both on term compression when compared to life of device deals and some pricing differential between our life of device licenses and our term based offerings. We expect to recover this top line impact as renewals come in overtime. This impact of the faster than expected push to subscription is reflected in our Q3 in fiscal year 2020 top line guidance. Exclusive of our professional services billings, our goal is to ultimately drive our subscription billings to 100% of total billings. The average dollar weighted term length in Q2 ‘20 including renewals was 3.9 years flat with the 3.9 years we reported in Q1 ‘20. As with last quarter this calculation assumes life of device licenses or five-year terms. Some specific Q2 financial highlights; TCV revenue or software and support revenue for the second quarter exceeded our guidance range of $330 million to $335 million coming in at $338 million up from 14% a year ago and up…

[Operator Instructions] Your first question comes from the line of Rod Hall from Goldman Sachs. Your line is open.

Thank you. This is RK [ph]. I wanted to do ask about ACV. You reported 18% growth versus your guidance for 24%. So is the delta all driven by the Federal business or are there any other factors to think about then, could you give us more color there? And I have a follow-up.

Sure. So a vast majority was driven by the Federal underperformance in the quarter and also just the subscription impact. We mentioned five million of TCV, so there’s some ACV in there. And, you know, if you look at this ACV metric, it is a real-time metric of the business and we decided to provide that last quarter, because I thought it was important to give that kind of metric that you can’t hide from anything. It is what it is. And I think it’s important metric during a subscription transition, that things are messy, and you can’t really get a good feel for the business going forward. But I think, we’ll continue that through this fiscal year, and then probably end up transitioning to a more conventional ACV, which is more of a waterfall -- kind of fourth quarter waterfall type ACV metric that most companies show there. But, yes, it was mostly clearly mostly Federal, and a little bit of the subscription top line impact.

Thank you. And I wanted to take a step back and talk about your subscription transition. You had some problems with setting the pricing, right, and the sales motion and the discounting. So could you talk about where you are with each of these challenges and how you see that moving forward?

Sure, Dheeraj, you want to?

Yes, I mean, both of us should probably chime in. I think, you know, pricing was a big change almost a year and a half ago, I would say, and we have mostly past it. Sales and customers have been surprisingly very receptive. I think, you know, customers -- we thought that the large customers will probably not move to subscription this quickly. But we’ve been pleasantly surprised at how much they’ve actually been forthcoming and willing to actually move from the old license model to the new license model. Even the channel, for that matter, including the global system integrators have actually moved in that direction quite well. I think we had a conservative view on when we’d get to 80%. That was in December, January of 2020-2021, is when we said we’ll get to 80%. But one of the things we learned along the way that we have to plow through this as fast as possible. And as we realized that the large customers are willing to take this, went ahead and said let’s get ready to take 80% even if it means it’s year and a half ahead of time actually.

And on the discounting that you asked about their, we continue to focus that, obviously a lot in the back office work there and changed some processes and things. So that’s ongoing. It will continue to be ongoing. I think we’ve made some pretty good progress there. But, clearly, we have some more progress to go. And then we’ve, realigned some of the pricing -- list pricing and things like that, but it takes a while for that to flush through. But, we continue to focus on both those.

Thanks, guys. Good luck.

Your next question comes from line of Aaron Rakers from Wells Fargo. Your line is open. Aaron, your line is open.

I want to go back to the sales kind of motion. Can you talk a little bit about with your plans to kind of, pause the spending or the investments in the sales organization, how we should think about, the guidance relative to the productivity ramp you’re seeing in some of the new sales hires? And I think if I calculate productivity, right, it looks like you’re down 20% or 25% versus what you were call it a year ago on a billings basis. Do you think that we can see productivity back at the levels that we’ve seen back a year plus ago? And I have a follow-up.

Yeah. Let me let me start and Dheeraj can chime in here. Two things. First of all, we mentioned that we’re not pausing sales teams. So that’s very important that that comes across clearly. We’ll continue to hire sales teams, because any downturn period, the worst thing in my mind you can do is halt sales teams, because -- so you have a little pause. In this case, it’s completely out of our hands. I think we’re being prudent. But if you start pausing on sales teams then it takes you twice as long to get back to an accelerated growth, because then you got to go hire folks and ramp them and things like that. So we’ll continue with the vast majority of our sales teams hiring there. And then the productivity, you mentioned, I’m not sure how you’re calculating that. But it’s not close to, what we’ve seen from a productivity degradation came down a little bit in ‘19.Came pretty close to what we expected here in Q2. And, Q1 was up from Q4, so --

And ACV.

Yes. And we really look at it on ACV basis, because it takes any term change out of the equation and it puts it on a equal playing.

If anything, that has only stayed better.

Yes.

Yes.

Okay, fair enough. And then as a quick follow-up, you talk to you in this quarter about the engagement with HP Enterprise. I think there’s 117 new customers. I think, last quarter you did 25. So, as you kind of continue to deepen the engagement there, how are you seeing that relationship evolve? Is there more to potentially come or deepen with regard to the HP go-to-market? When might that happen if there is? Thank you.

It’s an ongoing partnership discussion. Every quarter we get into know more about their aspirations as well. And, obviously, primarily, they have a pretty large server centric business. And while we -- as I said, you know, we’ve done a pretty good job with Dell and Lenovo and Fujitsu and others. I think HP is becoming a pretty substantial portion of our both enterprise and commercial go-to-market. So, you know, I don’t want to speculate anything about the future. But all I can say is that it’s looking like it’s a win-win for both sides. And demand being more things to come with subscription of our software in their hand with Green Lake and, especially some things around how we can -- go to market together and sell together, including their existing products.

Thank you.

Next question comes from a line of Jason Ader from William Blair. Your line is open.

Thanks. Duston, just on the APJ impact from the virus. Is it right to think that’s all demand and not supply at this point?

Correct. Yes, we’ll have to look at the supply thing. I think Q3 is -- from what I see and what I’m told here is that Q3 looks to be okay. And maybe a little tight and then depending on what happens with the factories and folks coming back to work here, it’s a little bit -- we’ll have to see there. But, yes, that’s, that’s not a not a supply issue. And what’s happening in the region, quite honestly, is -- if you look at this, nothing happening in China. There’s really no meetings happening in several other countries and we’ve got -- if you look at the impacts to the Coronavirus in general in the verticals that it hits. Its retail, transportation and manufacturing and hospitality and travel and all that stuff. So, it’s kind of a ripple effect of this. We got our initial roll up from our APJ folks. And, as I mentioned, we’ve got a couple very intriguing, interest and deals in Japan that we feel really good about, but the timing of those, we just can’t take aggressive stance on that at this point.

Okay. All right, because, Microsoft just preannounced

Yes.

I mean, I don’t know if you saw that. But they talked about supply.

Jason, I think the important thing to understand here is, is we feel good about the business. There’s two things happening. One that’s got 100% completely in our control, and there’s another thing that’s 100% out of our control. And, we’re really happy about the subscription transition, because, again, the quicker we get through here, the better it sets up the model when the renewals come -- start to flow in here. So we’re really pleased on that. And we’ll take the hit on the top line any day to go faster there. And then, you know, hopefully, we’re taking a reasonably prudent view on some unknown factors related to the virus, so we’ll see how that plays out. But the business itself, which we talked about in the script, and everything else. We feel good, large customers, repeat purchases, big -- Global 2000, new products. Everything is tilted in the right direction, except, we’ve got one big unknown here that we can’t control.

Yes, and so qualitatively just.

That’s why we keep asserting that business is robust and quantitatively we just have to be a little bit more cautious.

And on the subscription transition, do you have a forecast you had at 75. Obviously, you’re going to far surpass that. What would you say would be a good guesstimate for Q4 right now in terms of percentage of billings from subscription?

Yes, it’s probably going to bounce around a little bit. We had a pretty good acceleration this quarter, so probably not too much different. But, we’ll again, update a couple of these thoughts at Investor Day here coming up on March 26th. So.

Yes. For the first time you put this new sales comp this past.

Yes, yes, and we’re starting to tweak our sales comp. We put a roadmap in over the next several years for sales comp and how we end up morphing the sales comp ultimately to take advantage of the leverage effectively of this -- of our subscription business and the renewals and things like that. And this is the first period that we’ve actually put a negative multiplier on some LOD business and in the next 6 months we’ll put a negative multiplier on any LOD business. So I think that naturally there will start shifting some of our bigger legacy customers over to subscription over the next 6 here too.

Thank you.

Your next question comes from the line of from Wamsi Mohan Bank of America. Your line is open.

Thank you. Just to follow up a little more on the Coronavirus situation. Can you give us some color on how you’re coming up with that estimate? I mean, when you say that it’s based purely on APJ demand, it seems like demand in other regions is also getting impacted as this situation remains quite fluid. And secondarily supply -- for the server supply chain seems like that might be impacted, very near term, so is there more clarity -- can you give us some clarity on why you think supply might not really be an issue in the near term, and I will follow up.

No, what I mentioned is Q3, from what we’re being told, it doesn’t -- it looks tight, but it doesn’t look at this point to be a serious issue from our perspective.Q4, I don’t know, it depends on how this progresses here. I think the reason why we have a little bit more point of view on APJ is that, there’s been a longer issue there. And, we’ve had a chance to kind of digest that and get some forecasts and things like that. We mentioned that EMA we’ve -- looks good, and we’ve got good pipeline there and the second half looks really good. But this assumes that there is not significant impact that migrates into there. And we just can’t at this point, guess what might happen or guess what my happen with the server supply chain.

And then, I think, HP hasn’t told us anything to the contrary. And some of our legacy supply chain is Taiwan, not China. So I think it’s not in the list of countries that people at least have talked about in the past. So I mean, we are making an educated guess in saw this stuff as well. But we do feel like this is a pretty good guess for the next half.

Okay, thanks for that. And then, Dheeraj, there have been some high profile changes in management at IBM and Google Cloud. How do you think this changes the competitive landscape? Do you think it does or not? And also the M&A landscape around this? Thank you.

Well, I think, we definitely feel like, we will be becoming more and more of a software company running -- I mean, as I mentioned this in the last paragraph of the script that the cloud becomes the new server for us. And the big issue with the public cloud right now is enterprise workloads have a tough time to lift and shift. And all of sudden if our software can bring that level of virtualization where it doesn’t matter where it’s running on commodity servers on-prem, or commodity servers off-prem, I think it really opens up new surface area for our software. And I think we are looking at the next 3 to 4 years to be such a transition. No different than when we transitioned from pure appliances to OEM and to Dell back in 2014.I mean, over the course of the next 3-4 years, a quarter of our business was running on Dell nodes. And I think a lot of that stuff we expect to see from hyperscalers too actually. So, you know, IBM, with the Red Hat thing will definitely be a partnership opportunity for us, especially around containers and hybrid cloud and IBM Cloud as well. And also, some of the work that we’re doing with them on their Power and AIX software -- they have an operating system in AIX that we believe can we can modernize. I think, in Amazon and Azure, really good, I would say, engineering work going on. You will see this year to be the year when the hyperscalers get really close to us and we do the same with them. And we think that will actually prepare them for a true lift and shift that is not at the mercy of just global system integrators coming and trying to rearchitect the approximately, because rearchitecting the app to go -- move it to the public cloud is really, really hard and risk prone.

Thanks, Dheeraj.

Your next question comes from a line of Katy Huberty from Morgan Stanley. Your line is open.

Thanks for the question. Going back up, Duston, to your reference to sales force compensation changes. What are you doing around shifting compensation from TCV to ACV? And then related, you mentioned that you’re confident that you can close the gap between term and life of device pricing on renewal. Is it the sales force compensation changes that can help you around pricing? Have you seen renewals yet? Such that you have confidence that you can -- you could raise prices as customers come up on their renewal?

Well, we haven’t seen many renewals, quite honestly, on true subscription. You know, most of these haven’t timed out yet on it from that perspective. We do know, I mean, if we just will show a graph here at Investor Day if you simply take an average three-year CBL deal, and assume that renews for another three years. So two to three-year CBL deal, compared to a five-year life of device, and if that renewed for one-year of support, so you had comparable six-year periods. That the two to three - year CBL deals clearly exceed the value of that life of device five-year plus one-year renewal. So there’s no doubt when you look at the averages of what we’re pricing things, it’s just that we take a hit up front. But through that six-year period we’re much better off. So we just have to wait a little bit here. And then on the sales comp. I think the good news about the sale comp is that we can again we do commissions in six months period, which is really great in a period like this that we can kind of morph things every six months instead of year. So we will highly likely morph to ACV way before we need to and because we’re kind of being seen was from that perspective we believe and then will kind of run with that mentality and photo setting and things like that. So when the renewals flow in, I think we’ll be in pretty good shape to actually get some leverage from those renewals because just like any subscription business those renewals have to come in at a much higher efficiency factor. Hopefully we can show this in a reasonably thoughtful interesting way how this more so [indiscernible] over the next several years at Investor Day and how we see leverage playing in once these subscription renewals come at various efficiency factors and how the percentage of the business becomes pretty large portion in the outer years, as subscription renewals and things like that. I mean we’re really happy about the faster pace to subscription, but a lot of the benefits are going to come in a couple of years.

So the shift to ACV that will be six months out or more that’s not in the current sales compensation changes.

Correct. Yes, what we’ve done in the current sales comp that we started to put some negative multipliers on LD business.

Okay and then just lastly from me. Sorry.

And to the next phase, we’ll probably have some type of ACV transition.

Okay and just lastly, you surpassed margin guidance and took it up for the full year. Can you just talk about drivers of upside and gross margin?

Yes, it’s pretty simple when you look at it because right now the cost of bucket that we operate within, obviously software is 100% margin, but the cost bucket now is with the support model and now the support teams historically done a pretty good job of gaining leverage there and so in this case, we had a pop up and top line and we can leverage that support structure. So it’s just more top line a small increase in the support cost and other cost internally here. So I know we guided 80% next quarter but that’s just because it’s a smaller top line base on a similar cost structure. But as I think we can continue to leverage that slightly as the top line continues to increase.

Great, thank you.

Your next question comes from the line of Mehdi Hosseini from Susquehanna. Your line is open.

This is Nick filling in for Mehdi. So turning to the full stack of next fruition, how much is that impacting your billings and specifically is it, what percentage of the billings are actually for the entire stack?

I think we mentioned last quarter was 11%, this quarter it’s 13% of our bookings.

Yes, it’s concerned to new products.

New products on top of the core product itself. I think they are fairly accretive in many ways. There’s a lot that we talked about in my earnings script as well, where many of these customers actually are buying our enter stack because they’re really comparing it to cloud. The private cloud has to look like the public cloud in many which ways. If anything, we’re really pleasantly surprised to see that this attach in the overall contribution in global 2000 is higher than the overall company average that number 13% is higher in the global 2000 which basically tells us that, this is not one of those conventional mid-market first sort of portfolios that we’re actually selling, compared to let’s say our hypervisor which really started more in the mid-market for the first three, four years before it went up market. I think many of our new products especially the ones around automation and databases and security. They’re really starting equally if not better actually in the global 2000.

And do you break down that 13% base off of new customers versus maybe existing customers who are upgrading or do you not have those numbers?

We don’t. I mean the only interesting statistic there than the 13% when you look at the global 2000 that 13% is actually a little bit bigger. So you might have some perception that this might be mid-market type customers trying things out. It’s actually playing very well in our, these new products are playing well within our big customers.

Okay perfect and then just one follow-up on cash burn. [Indiscernible] that’s concerning you guys in the near term. I know that the balance sheet looked a little bit better but maybe talking about that little bit.

Even with little bit of change in the top line guide we still believe we’re in the same range that we’ve been talking about what the consensus is roughly today $250 million or so. So we’ll try to continue to kind of manage that bucket.

Okay, perfect. Thank you.

Your last question comes from the line of Jack Andrews from Needham. Your line is open. Q –Jack Andrews: I was wondering if you could shed some additional light on just where things stand with your solutions based approach on the go-to-market side. Nice to hear that you’re seeing some success, but could you provide some broader tough context in terms of just how much is your sales force is fully enabled with this approach. And similarly, where do you stand with your partners in terms of getting them to embrace this solutions based approach?

Great question. I mean you know there’s two parts to this. One is, the way we talk to our customers which are new customers or new campaigns call it more North South and there we are really leading with things like databases and end user computing and private cloud and remote/edge and things like that. And all our sellers especially in the – I would say global 10,000 where you really go sell solutions because when you start to get lower in the mid-market it’s hard to sell a solution to a first time commercial customer. Obviously there’s a lot of HCI, plus Files, maybe a little bit of operations management that’s going on in the mid-market. So the answer is a little bit more nuance because of the segment but I would say that, all of our enterprise sellers are really been doing this and that’s the way they actually can go create a pipeline. The pipe is not created, we’re just doing a bottom up selling off infrastructure. It’s more work load driven and solution driven actually. The channel is getting there. I think we’ve not yet started to track pipeline for solutions that’s where the next sort of evolution of this solution driven approach is when we start to really track entire funnels that are driven by pipeline itself, but that’s the next phase of the journey. Q –Jack Andrews: Got it, thank you very much.

This concludes today’s earnings call. We thank you for your participation. Have a great day.