Enterprise cloud networking services provider Nutanix Inc. (NASDAQ:NTNX) concluded its fiscal 2018 year with a marked improvement in gross profitability. However, longer-term investments in marketing and research and development compressed bottom-line results. We'll discuss the balance between gross and net profitability below after a quick look at headline numbers from the final three months of the fiscal year:

Nutanix: The raw numbers

Metric Q4 2018 Q4 2017 Growth (YOY)
Revenue $303.7 million $252.2 million 20.4%
Net income (loss) ($87.4 million) ($66.1 million) N/A
Diluted earnings (loss) per share ($0.51) ($0.43) N/A

Data source: Nutanix.

What happened this quarter?

  • Software and support services revenue expanded by 49% against the prior-year quarter to $269.7 million.

  • Software and support services billings, which measures recorded revenue plus the year-over-year change in deferred revenue, grew 66%.

  • As was the case last quarter, Nutanix's hardware sales dropped precipitously, though by management's design. Hardware revenue declined by roughly 50% to $35.9 million. Nutanix recently decided to de-emphasize the sale of low-margin and nonmargin pass-through hardware. Instead, the company is focusing on its core cloud software sales while referring customers to third-party partners for accompanying hardware appliances.

  • As hardware sales decline, Nutanix's gross margin continues to rise commensurately. Gross margin in the fourth quarter jumped by 14.5 percentage points against the fourth quarter of 2017 to 75.9%. The impressive leap resulted in the highest quarterly gross margin in the company's history.

  • As you can see from the table above, however, the rate of the company's net income and per-share losses actually increased over the last three months. Higher marketing expenses, research and development costs, and general and administrative expenses neutralized the improvement in gross profitability and pressured the company's bottom line. As Nutanix attempts to increase its market share and maintain a relatively fast pace of new product innovation, net profitability will likely be sacrificed for the next several quarters.

  • It should be pointed out that roughly $52 million of a $91 million increase in the operating expense categories listed directly above took the form of noncash stock compensation expense.
  • Thus, Nutanix was able to generate positive operating cash flow of nearly $23 million during the quarter, bringing its full fiscal-year total to $92.6 million against just $13.8 million in fiscal 2017.

  • Deferred revenue on the company's balance sheet ballooned by more than 71% to $631.2 million. The deferred revenue increase is important to track, as it represents revenue that will be recognized in future periods.
  • The company added roughly 1,000 new customers during the quarter, widening its total customer base to more than 10,600 customers. Nutanix also closed the largest deal in its history in the fourth quarter, worth more than $20 million, as it expanded a current engagement with an unnamed customer.

  • A few days after the close of the quarter, on Aug. 3, Nutanix announced its agreement to acquire Mainframe2, Inc., which does business under the trade name Frame. Frame is a leader in virtual desktop technology and will expand Nutanix's reach into the "desktops-as-a-service," or DaaS, market. The company hasn't yet disclosed financial details of the pending transaction.

Woman holding laptop with superimposed lines of code; software programming concept.

Image source: Getty Images.

What management had to say

During the company's earnings conference call, Nutanix CEO Dheeraj Pandey reflected on both the quantity and quality of the company's customer base over the last quarter and last fiscal year. Heading into fiscal 2019, Pandey's comments give shareholders a sense of opportunities for recurring revenue and current client expansion, which the company can build on in the coming quarters:

[W]e added approximately 1,000 new customers, bringing our total number to 10,610. In this last fiscal year, we added nearly as many customers as we had when we IPO-ed two years ago. We now count 710 Global 2000 companies as customers, adding approximately 40 in Q4 2018 and 140 overall in fiscal 2018.

Q4 also brought continued momentum in large deals with 46 deals worth more than $1 million, nine of which were worth more than $3 million and two of which were worth more than $5 million. We closed 201 deals worth more than $1 million in fiscal 2018, up from 144 in fiscal 2017. And now we have 26 customers with a lifetime spend of more than $10 million, up from 11 in fiscal 2017.

Looking forward

Nutanix typically issues guidance for the following quarter and refrains from providing a full-year outlook. For the first quarter of fiscal 2019, the company anticipates revenue of between $295 million and $310 million, which, as management notes, implies 40% to 45% year-over-year growth in software and support revenue. 

The company expects to post a non-GAAP loss per share of between $0.26 and $0.28 next quarter. As I observed above, Nutanix typically incurs a significant amount of stock compensation expense within its three major operating expense categories, and this usually comprises the majority of the difference between GAAP and non-GAAP earnings (or losses) per share. At the midpoint of the provided range, the company's projected loss per share would represent slippage of $0.11 against the $0.16 loss Nutanix posted in the first quarter of fiscal 2018. 

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool recommends Nutanix. The Motley Fool has a disclosure policy.