Nutanix (NASDAQ:NTNX) came into its third-quarter earnings report having already given investors in peek into its numbers with a preliminary report early in May. Nonetheless, the results were better than the company had hinted. Below are some of the highlights:

  • Revenue was up 11% to $318.3 million, boosted by 18% growth in software and support revenue to $314.5 million, compared with the company's own guidance of $300 million-$320 million. Total revenue also beat analyst expectations at $307.4 million. Software and support revenues are outgrowing the overall total as the company shifts to a software subscription model.
  • Eighty-four percent of billings came from subscriptions, and the subscription gross margin improved from 73.9% to 77.3%. Revenue from subscriptions increased 55% to $261 million, showing the strength and momentum of its subscription model.
  • Total customers increased by 700 to 16,580, and customers with lifetime bookings over $1 million increased from 1,060 to 1,122.
  • The company had a 132% dollar-based net expansion rate and a 97% retention rate, showing existing customers are pleased with the product and continuing to spend more with Nutanix.
  • On the bottom line, adjusted loss per share widened from $0.56 a year ago to $0.69, which was better than analyst estimates for a per-share loss of $0.88 and the company’s own guidance of a $0.89 loss.

Though Nutanix hit its marks in the third quarter and appears to be executing on its subscription strategy, the company pulled its guidance for the full year due to the uncertainty around the COVID-19 pandemic. What was notable about the company's strategy during the pandemic so far is that it has been taking the opportunity to slim down and become more efficient.

A digital image of a cloud

Image source: Getty Images.

Focusing on profitability

The hyperconvergence infrastructure specialist set a goal of operating expenses coming in between $375 million and $400 million on an adjusted basis for the coming quarters, which would be in line with $391 million in adjusted operating expenses it had in the third quarter.

In order to accomplish this, the company is implementing rotating unpaid furloughs for most employees for one week in the fourth quarter and first quarter of 2021, and executives are taking a 10% pay cut. Hiring has been extremely limited, and merit increases and bonuses have been paused. The company also said it's been able to make sales more efficiently during the pandemic, sometimes saving half the usual costs since travel has been eliminated.

CEO Dheeraj Pandey noted that the company's headcount had grown significantly since it went public in 2017, and that 70% of employees had not been with the company when it was still private and run in a more cost-efficient manner. Therefore, Pandey sees an opportunity for the company to become more efficient and emerge from the crisis in a stronger position, a process he called annealing.

The growth path ahead

Nutanix is seeing some tailwinds with the cultural shifts from the pandemic -- work-from-home protocols have led some companies to look to its infrastructure products for help, and it's also seen traction in areas like telemedicine, e-commerce, and remote learning. That bodes well for continued growth during the crisis, as some of those disruptive technologies, like telemedicine, are accelerating.

The company may now be at a turning point. It's six months past its hardware eliminations, meaning its growth rate should naturally accelerate in three more quarters as the business becomes almost all subscriptions and comparisons get more straightforward. CFO Duston Williams also noted that since the company's subscription model is new, less than 10% of its sales are renewals; it's mostly reliant on new customers and upsells. By comparison, mature SaaS companies tend to get 50% of their sales from renewals, making the business much more predictable and less dependent on sales and marketing expenses.

That means Nutanix should start moving toward profitability, especially with its focus on controlling costs. Though that process will take time to play out and there's an added degree of uncertainty from the pandemic, the company seems well poised for continued growth, and in a position to emerge from the pandemic stronger. At its current price, the stock is still significantly cheaper than many of its cloud-based peers, giving it significant upside potential.