Early in its current fiscal year, enterprise cloud networking services provider Nutanix Inc (NASDAQ:NTNX) began to de-emphasize sales of its partners' hardware products in favor of focusing on its own core cloud-based software offerings. The company's fiscal third-quarter 2018 earnings report, released on May 24, reflected higher profitability and improved cash flow, which can be traced in part to this decision. Let's review the details of the quarter after first walking through headline numbers directly below:

Nutanix: The raw numbers

Metric Q3 2018 Q3 2017 Year-Over-Year Growth
Revenue $289.4 million $205.7 million 40.7%
Net income (loss) ($85.7 million) ($96.8 million) 11.5%
Diluted earnings (loss) per share ($0.51) ($0.67) 23.9%

Data source: Nutanix. 

What happened this quarter?

  • Nutanix delivered another quarter of accelerated revenue growth as software and support billings grew 67% year over year, while recorded software and support revenue improved by 55%. 

  • Conversely, pass-through hardware billings decreased to 17% of total revenue versus 25% of total revenue in the third quarter of 2017. This decline reflects the new intent to allow customers to buy hardware appliances of their choice directly from third-party partners.

  • The company won three software and support deals in excess of $5 million during the last three months, and the number of million-dollar deals signed increased 28% over the comparable quarter to a total of 47. 

  • Nutanix reported that adoption of AHV, the company's built-in hypervisor (cloud virtualization environment), grew to 33%. This calculation is based on an average of the last four quarters, using AHV nodes as a percentage of total NX (Nutanix Hypervisor series) nodes sold.

  • The transition to software-based revenue, coupled with controlled research and development spending, helped boost gross margin to 67%, an impressive year-over-year improvement of 7.5 percentage points.

  • Higher margin and disciplined working capital management has resulted in improved cash flow during the current fiscal year. Net cash provided by operating activities in the first nine months of fiscal 2018 increased nearly ninefold over the comparable 2017 period to $69.8 million. 

  • The company's total deferred revenue balance, an indicator of future recognized revenue, expanded at the healthy rate of 46.2% over the third quarter of 2017 to $539.9 million.

  • During the quarter, Nutanix acquired Netsil, a San Francisco-based provider of cloud optimization software that increases observability within distributed cloud environments. Nutanix also bought Minjar, a cloud governance and optimization specialist based in Bengaluru, India.

Cog wheels with human figures projecting from spokes.

Image source: Getty Images.

What management had to say

Nutanix CEO Dheeraj Pandey took the opportunity during the earnings conference call on May 24 to discuss three new promising products that were announced at the company's recent ".NEXT" user conference in New Orleans: "These three new additions to our product portfolio, Nutanix Beam, Era, and Flow, are important not only for their strategic value to our business, but also for the new opportunities they open for customers in our platform. These offerings will help our customers better manage their hybrid cloud environment, while helping to solidify our unique thesis of building an enterprise operating system from the ground up for a multi-cloud world."

The three new offerings exemplify Nutanix's strategy of providing solutions that simplify complexity while reducing cost for enterprise users. Beam provides insight and visibility into a company's cloud spend, allowing administrators to monitor consumption, identify cost savings, and even implement suggested savings directly through the software. Era is an automated database operations suite featuring database snapshot software powered by so-called time machine technology. Flow is a software-designed networking (SDN) solution that provides security focused directly on applications rather than the network perimeter.

Each of these new products operates along the core principle of simplicity espoused by management and found within the company's popular "one-click" software environments. They also demonstrate Nutanix's growth beyond networking into what Pandey envisions as a "compute, storage, networking, security, and application mobility company."

Looking forward

Nutanix management avoids medium- and long-term guidance, preferring to look forward in three-month increments. For the fourth quarter of 2018, assuming that it eliminates $95 million of hardware pass-through sales, the company expects to book between $295 million and $300 million in revenue. Hitting the midpoint of this tight range would represent roughly 31.5% top-line growth over the fourth quarter of fiscal 2017.

On the earnings front, Nutanix only provides non-GAAP guidance. Typically, Nutanix removes stock-based compensation from labor expense on its income statement in its non-GAAP numbers. This adjustment usually makes up most of the variance from GAAP in Nutanix's non-GAAP projected earnings (or loss) per share.

Management expects to generate a net loss of $0.20-$0.22 per diluted share of stock next quarter. The midpoint of $0.21 would mark an improvement of roughly 46% against the loss per diluted share of ($0.39) recorded in the final quarter of last year.

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