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Nutanix Leaps Ahead of Its Own Guidance

By Asit Sharma – Nov 28, 2018 at 12:55PM

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Revenue and net earnings surpassed management's targets, while gross margin continued to benefit from a shift in product mix.

Enterprise cloud networking specialist Nutanix (NTNX 3.25%) reported fiscal first-quarter 2019 earnings results after the close of trading on Tuesday. Complementing faster revenue growth, the company's subscription services increased as a percentage of total sales. We'll discuss the implication of this trend below, after a review of both headline numbers and pertinent details from the last three months. Note that all comparison numbers in this article refer to the prior-year quarter (the first quarter of fiscal 2018).

Nutanix: The raw numbers

Metric Q1 2019 Q1 2018 Year-Over-Year Growth
Revenue $313.3 million $275.6 million 13.7%
Net income (loss) ($94.3 million) ($61.5 million) (53.3%)
Diluted earnings (loss) per share ($0.54) ($0.39) (38.5%)

Data source: Nutanix.

What happened this quarter?

  • The company's top-line tally of $313.3 million exceeded the high end of management's projected revenue range, provided last quarter, of $305 million to $310 million. Nutanix generated non-GAAP earnings per share (EPS) of negative $0.13. The $0.13 loss per share also surpassed previous guidance, which indicated a first-quarter loss of $0.26 to $0.28 per share.

  • Deferred revenue, an important barometer of future revenue recognition, improved by 72% to $701.8 million.
  • Billings (i.e., recorded revenue plus the year-over-year change in deferred revenue) of $383.6 million easily outpaced prior-year billings of $315.3 million. Subscriptions reached 51% of billings.

  • Software and support revenue jumped more than 44% to $280.7 million.

  • Nutanix's continued shift to software services benefited gross margin, which increased by nearly 16 percentage points to 76.3%. During the first quarter, the company eliminated $104 million in pass-through hardware revenue (i.e., hardware from third-party partners with little or no margin).

  • Despite the notable improvement in gross margin, operating expenses jumped 48% to $344.4 million, a total that represents 106% of Nutanix's revenue during the quarter. Increased spending on sales and marketing as well as research and development pushed up operating expenses in comparison to the prior year (and, consequently, the company's net loss).

  • Stock compensation expense accounted for nearly $66 million of total operating expenses, versus $35.5 million in the first quarter of fiscal 2018. A higher proportion of stock compensation expense to total operating expense contributed to better cash flow over the past three months. Nutanix's cash from operations nearly quintupled to $49.8 million. Free cash flow of $20 million marked a considerable improvement over the negative $7.9 million in free cash flow burned through in the first quarter of 2018.

  • Alongside earnings, the company announced the availability of Xi Cloud Services, a software suite that combines core Nutanix technology with Internet of Things (IoT) applications. Nutanix describes the offering as a tool "designed to create a more unified fabric across different cloud environments."

Woman using a tablet to ship packages in a factory with an overlay of cloud computing symbols.

Image source: Getty Images.

What management had to say

During Nutanix's earnings conference call, CFO Duston Williams discussed its transition from software license sales integrated with third-party hardware revenue to a predominately software sales model that increasingly generates stable recurring revenue in the form of subscription services. While Williams' narrative is worth reading in its entirety, the following is the crux of it:

In FY [fiscal year] '17 our subscription business accounted for 31% of our billings, in FY '18 our subscription business accounted for 41% of billings, and in Q1 '19, the subscription business accounted for 51% of billings. In Q1 alone, our new term-based licensing accounted for over $20 million in bookings. We believe that in the next four to six quarters, our recurring subscription business will reach 70% to 75% of total billings. And by FY '21, we expect a large majority of the business should be recurring in nature, either [on-premises] or cloud-based.

In our view, this continued shift to [a] recurring subscription business model combined with retention rates averaging 90% and an average contract duration period of 3.6 years demonstrates increased visibility and predictability into our model as the company moves away from life of device licenses.

Looking forward

Alongside earnings, Nutanix provided its outlook for the fiscal second quarter of 2019. The company expects revenue to fall within a range of $325 million to $335 million. Billings are projected to land between $410 million and $420 million. Management doesn't provide a quarterly GAAP earnings expectation but anticipates that non-GAAP earnings per share (EPS) will land at a loss of $0.25, compared to a loss of $0.14 in the second 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.

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