One quarter after cloud infrastructure software provider Nutanix (NASDAQ:NTNX) tapped the brakes on revenue growth, signs emerged that the company is preparing for new top-line expansion. Fiscal fourth-quarter 2019 results, released after the markets closed on Wednesday, met the company's targets on sales and presented a reduced per-share loss versus management's guidance. Below, we'll walk through vital details from the quarter and review the organization's outlook going forward. Note that all comparative numbers below refer to those of the prior-year quarter.
Nutanix: The raw numbers
|Metric||Q4 2019||Q4 2018||Change|
|Revenue||$300.0 million||$303.7 million||(1.2%)|
|Net income (loss)||($194.3 million)||($87.4 million)||(222.3%)|
|Diluted earnings (loss) per share||($1.04)||($0.51)||(204%)|
What happened this quarter?
- Revenue of $300 million landed near the high end of management's projected range of $280 million-$310 million. This range, provided last quarter after the company ran into sales execution issues, represented a slower-growth scenario versus previous earnings periods.
- Billings (recorded revenue plus the year-over-year change in deferred revenue) declined by 6% to $372 million. However, this fell near the top of management's guidance for billings of $350 million-$380 million.
- Software and support revenue increased by 7% to $278 million, reflecting the company's shift to a subscription-based model.
- Gross margin as calculated by generally accepted accounting principles (GAAP) rose 110 basis points to 77%. Non-GAAP gross margin hit 80% during the quarter, well exceeding management's target of approximately 77%. Both GAAP and non-GAAP gross margin benefited from higher subscription software sales and a continued reduction in pass-through hardware sales.
- Operating expenses went up considerably against the comparable quarter, as Nutanix poured money into sales activities and research. Sales and marketing expense jumped by 40% to $910 million, while research and development expense soared nearly 60% to $501 million. General and administrative expense increased by 38% to $120 million. Nutanix booked an operating loss of $1.5 billion during the quarter.
- Nutanix's non-GAAP net loss per share of $0.57 favorably came in below management's projection of a loss of $0.65.
- Deferred revenue, an important metric in gauging future revenue recognition, improved by 44% to $910 million.
- The organization's operating cash flow fell to a net use of $10 million, versus operating cash flow generation of $23 million in the prior-year quarter.
- Nutanix added nearly 1,000 customers over the last three months, bringing its total base to 14,180 customers.
What management had to say
In Nutanix's earnings press release, CEO Dheeraj Pandey indicated that the company's sales function has stabilized, and that issues with prospective customer development and new sales personnel hiring are being resolved:
We delivered a solid fourth quarter and believe our performance reflects our execution improvements and the meaningful progress we have made transitioning our business to a subscription model. We are encouraged by our record gross margins, strengthening pipeline, progress in sales hiring, and recent large customer wins. We have a strong set of tenured sales leaders in place and continue to lead the industry as an innovator with technology at the forefront of hybrid cloud transformation.
CFO Duston Williams also commented on firming sales, with an emphasis on improvement across key metrics:
We are pleased by our Q4 results, and that the actions we have taken to strengthen lead generation and enhance sales execution are generating positive results. Our subscription transition continues to be ahead of schedule with subscriptions growing from 52% of total billings in the fourth quarter of fiscal 2018 to 71% in the fourth quarter of fiscal 2019. In addition, 26% of our deals included a product outside our core offering, as new and existing customers increasingly look to Nutanix to guide them on their journey to hybrid cloud.
Nutanix provided investors with its fiscal first-quarter 2020 outlook alongside earnings on Wednesday. The company expects software and support revenue of $290 million-$300 million, which implies a return to growth, as it recorded $281 million in software and support revenue in the first quarter of 2019. Management anticipates that software and support billings will fall between $360 million and $370 million, versus the $351 million in billings booked in the prior year's first quarter.
As for earnings, Nutanix believes it will maintain a non-GAAP gross margin of 80% in the first quarter, and projects a non-GAAP net loss per share of $0.75. While steep losses continue as Nutanix aggressively pursues market share, a resumption of sales momentum more typical of a technology growth stock appears to have cheered investors considerably this quarter.