Share prices of Nutanix (NTNX -2.18%) were fluctuating after its fiscal 2021 second-quarter earnings report was released last week.
The cloud-based hyperconvergence specialist continued to make progress in its shift to a subscription-based model and in its decision to focus on annual contract value (ACV) instead of total contract value (TCV). Highlights from the report include:
- ACV billings rose 14% to $159.2 million, ahead of guidance for $145 million-$148 million.
- ACV run rate increased 28% to $1.38 billion, showing solid growth in the underlying business.
- Revenue was flat at $346.4 million due to headwinds from shorter contract terms, but that easily beat the analyst consensus of $327 million.
- On the bottom line, adjusted loss per share narrowed from $0.81 to $0.37, which also beat analysts' estimate for a loss of $0.48 per share.
Let's take a look at three other positive signs from the earnings report.
1. The transition to ACV is nearly complete
Nutanix took another step forward in its transition to ACV bookings as a way of aligning its sales with customer demands for flexibility, as opposed to selling based on total contract value or the life of device. Because of that switch, contract lengths have fallen over the last two years from 4.1 years to 3.4, and CFO Duston Williams said on the earnings call that it would eventually settle around 3 years. In an interview, Chief Communications Officer Tonya Chin said the company was 88% done with its transition, and that Nutanix was ready to step on the growth gas pedal once the move is completed. With its sales strategy become better aligned with accounting metrics, the trajectory of the business should become clearer to investors over the coming quarters. Williams noted that revenue growth should gradually resemble ACV billings growth as term lengths stabilize.
2. Emerging products are gaining momentum
Nutanix is best known for its core hyperconvergence infrastructure products, which combine computing, storage, and networking into one product. But the company is increasingly seeing progress with new offerings like Era, its database management tool, and Files, its storage solution. New CEO Rajiv Ramaswami called Era a "competitive differentiator" for Nutanix and said that the product was seeing repeat purchases from large enterprises.
New ACV from products like Era and Files more than doubled in the quarter, and the attach rate, or the rate of customers adding new products to the core HCI platform, rose from 31% a year ago to 37%. Nearly half of the Fortune 100 has now adopted at least one of the company's emerging products, showing it's gaining traction with large customers. Though emerging products are still a small percentage of revenue growth, there's a long runway for growth there. Chin said that IT professionals are now looking more closely at a hybrid and multi-cloud environment and see Nutanix's suite of products as being ahead of the curve because the company has been focused on the hybrid cloud for several years.
3. Profitability is improving
Nutanix has historically operated at a loss, but Ramaswami is focused on controlling costs and making the business profitable on a cash basis. On the earnings call, he said, "We will continue our transformation of our business model to subscription with a significant focus on renewals and our path to cash flow positivity." Nutanix significantly narrowed its free cash flow loss from $73.7 million to $28.3 million in the second quarter. Some of those gains relate to seasonality in spending and cuts in travel expenses during the pandemic, though the company acknowledged that spending levels wouldn't return to pre-COVID-19 levels, indicating a slimmer cost structure over the long term.
Ramaswami has also made a concerted effort to trim operating expenses, and adjusted operating expenses fell 11% to $354 million, largely because the company's marketing spending became more efficient in part from going virtual during the pandemic. Management also said the customer acquisition economics will become more favorable, as license renewals tend to have much lower sales costs than new licenses.
For the third quarter, the company forecast a 5%-6% drop in adjusted operating expenses even as it sees 11%-15% growth in ACV billings.
Nutanix has demanded patience from investors the last couple of years as the company has transitioned from hardware to software to a subscription, and more recently shifted to a sales focus on annual contract billings, selling term licenses rather than licenses based on life-of-device.
While the stock has struggled at a time when other cloud infrastructure companies have thrived, Nutanix seems to have a number of positive catalysts set to accelerate its growth, including the upcoming completion of the ACV and subscription shift, the growth from emerging products, and the focus on profitability.
The company is recognized as a leader by Gartner and has a net promoter score of 90 over the last seven years, showing it gets high marks for the quality of its product and for customer satisfaction.
The components are there for the company to succeed, and this quarter was a step in the right direction for Nutanix, but it has further to go to gain the same credibility that other cloud stocks have earned.